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Thursday, April 20, 2006

Gas price variation caused by population density?

GasBuddy.com, one of the coolest websites out there, has this graph portraying average gasoline prices by county:

What do we see? States/Counties with less population density seem to have lower gas prices. A few possible reasons for this are states with more population might have tighter regulations on reformulated gasolines, more populated states have higher taxes, and (one I haven't heard before) population density puts enhanced demand-side pressures on price.

Whether density has a causal influence on gasoline prices or density is simply positively correlated with the other institutional factors that might increase gasoline prices is an interesting empirical question.

Less dense states tax gas less? Differences in tax rates represent most of the cross sectional differences in gas prices. BTW, an optimal Pigovian tax that attempts to internalize negative externalities from gas consumption (e.g. congestion, pollution) would be lower in less dense areas where the marginal cost of the externality is lower.
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