Saturday, November 06, 2010

Understanding the Demand for Ethanol: A Bundle of Patriotism and Fueling Your Car?

My friend Soren Anderson has a new paper using some funky data to examine household preferences for ethanol as a gasoline substitute. Here is part of the Abstract; " I estimate the model using data from many retail fueling stations. Demand is price-sensitive with a mean elasticity of 2.5–3.5. I find that preferences are heterogeneous with many households willing to pay a premium for ethanol."

Why are many households willing to pay a premium for ethanol?  After all, isn't "gas gas"?  For a guy who owns a flex fuel vehicle, shouldn't the price of regular gasoline nail down the willingness to pay for ethanol?

One explanation that jumps into my mind is the belief that ethanol is "Made in the USA" and you are supporting our guys when you buy it versus helping some part of the OPEC oil cartel.

At least in this version of the paper, Soren doesn't test different explanations for why households differ with respect to their willingness to pay for ethanol.  Those with Flex Fuel cars have the option to buy such fuel but who exercises this option?

Permit me to offer some conjectures.

1.  Patriots pay the ethanol premium.  Couldn't Soren collect data by zip code from the 2000 Census on what are of residents are military veterans?   All else equal, I bet these communities are revealing a taste for buying ethanol over gasoline.

2.  Republicans are willing to pay this price premium?  Similar to my work with Dora Costa on the electricity nudges,  Soren could test this by collecting political affiliation data at the same geographic level as his ethanol consumption data.

Now, it would be quite interesting if I was correct about #1 and #2.  Why? Well I've never been correct before but more importantly this would be the first case when liberal greens (think of Berkeley, CA) are not leading the charge for a new green product.  Could this really be the case where "the other guys" are the guinea pigs?

Now Soren owes us an ecological regression of what communities buy Flex Fuel cars in the first place. Are they the conservative military communities?  All of you have read my "Do Greens Drive Hummers or Hybrids?" paper.   Soren can write the first cousin of that paper.