NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Do Americans Consume Too Little Natural Gas? An Empirical Test of Marginal Cost Pricing

Lucas W. Davis, Erich Muehlegger

NBER Working Paper No. 15885
Issued in April 2010
NBER Program(s):   EEE   IO   PE

This paper measures the extent to which prices exceed marginal costs in the U.S. natural gas distribution market during the period 1991-2007. We find large departures from marginal cost pricing in all 50 states, with residential and commercial customers facing average markups of over 40%. Based on conservative estimates of the price elasticity of demand these distortions impose hundreds of millions of dollars of annual welfare loss. Moreover, current price schedules are an important pre-existing distortion which should be taken into account when evaluating carbon taxes and other policies aimed at addressing external costs.

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Document Object Identifier (DOI): 10.3386/w15885

Published: RAND Journal of Economics, 2010, 41(4), 791-810. citation courtesy of

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