Working Paper: NBER ID: w15885
Authors: Lucas W. Davis; Erich Muehlegger
Abstract: 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.
Keywords: Natural Gas; Marginal Cost Pricing; Welfare Loss; Carbon Tax; Regulated Natural Monopoly
JEL Codes: D42; L50; L95; Q48; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regulated prices (P22) | consumption levels (E21) |
| regulated prices (P22) | welfare loss (D69) |
| markups over marginal costs (D40) | welfare loss (D69) |
| regulated prices (P22) | market distortions (D43) |
| welfare loss (D69) | inefficient consumption patterns (E21) |