Gas/car substitutes

When the price of gas gets to a certain level consumers will find substitutes for driving:

With the price of gas approaching $4 a gallon, more commuters are abandoning their cars and taking the train or bus instead.

Mass transit systems around the country are seeing standing-room-only crowds on bus lines where seats were once easy to come by. Parking lots at many bus and light rail stations are suddenly overflowing, with commuters in some towns risking a ticket or tow by parking on nearby grassy areas and in vacant lots.

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Some cities with long-established public transit systems, like New York and Boston, have seen increases in ridership of 5 percent or more so far this year. But the biggest surges — of 10 to 15 percent or more over last year — are occurring in many metropolitan areas in the South and West where the driving culture is strongest and bus and rail lines are more limited.

Here in Denver, for example, ridership was up 8 percent in the first three months of the year compared with last year, despite a fare increase in January and a slowing economy, which usually means fewer commuters. Several routes on the system have reached capacity, particularly at rush hour, for the first time.

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The increase in transit use coincides with other signs that American motorists are beginning to change their driving habits, including buying smaller vehicles. The Energy Department recently predicted that Americans would consume slightly less gasoline this year than last — for the first yearly decline since 1991.

The next to last paragraph would make a great example for microprinciples. There are three changes in the demand for public transportation in Denver. The price rises and consumers reduce their quantity demanded. Income falls and demand shifts left. The price of substitutes rises and demand shifts right (in a big way) and overall consumption rises.

The last paragraph suggests a potential movement into a long run change in gas consumption. As the auto fleet becomes more fuel efficient we are stuck with these smaller cars, even if gas prices fall (e.g., due fewer geopolitical risks).

Speaking of which (falling gas prices), policy makers should not let this happen. Implementing a higher gas tax (which has benefits greater than costs) in a period of falling gas prices would make much sense. Consumers would be less likely to perceive the pinch of the higher tax and it would facilitate gas price stability. Price stability is helpful for consumers and firms that must make long term plans.

And closer to home:

Some cities are seeing spectacular gains. The Charlotte Area Transit System, which has a new light rail line, reported that it logged more than two million trips in February, up more than 34 percent from February 2007.

But we can't attribute all of the 34% increase to a substitution effect. Since the light rail line is new, some of the increased ridership is due to the usual increasing demand for a new and unusual product over time.