EclectEcon

Over the weekend, The NYTimes led with a story that as gasoline prices rise and are expected to remain high, many commuters are switching from driving to using public transportation.

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....

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....

The national average for regular unleaded gasoline reached $3.67 a gallon, up from $3.04 a year ago, according to AAA.

If nothing else had changed, then a roughly 20% increase in the price of gasoline appears to have led to maybe a 10% increase in the demand for public transportation. The cross-price elasticity of demand appears to be approximately +0.5.

But these numbers are for now. Remember when gasoline prices were so high shortly after hurricane Katrina? At that point, people did not expect them to remain high, and so there was a much smaller switch to public transportation. The two situations reflect the importance of expectations and the importance of long-run vs. short-run shifts.

In the earlier case, because we did not expect gasoline prices to remain high, we did not alter our behaviour much; the cross price elasticity of demand between gasoline and public transportation was very small. In the current case, because we expect gasoline prices to remain high and quite possibly to rise in the future, more people are shifting away from driving toward the use of public transportation. This is more indicative of a long-run effect.