Release date: 23-Apr-04

Emory Economist Studies Regulations' Effect on Gas Prices

Why are we paying so much at the pump? One reason is the plethora of different environmental regulations across the country, says Emory University economist Ujjayant Chakravorty.

The nation's 50 states have dozens of different regulations determining what type of gasoline may be sold in that particular state, says Chakravorty. These state regulations are based on location-specific factors such as the weather, population, or driving patterns, all of which affect the type of gasoline that is best for the environment in that state--and the type of gasoline that can be sold.

The resulting "mini-markets" for gasoline mean that shortages in one state usually can't be supplemented with excess gasoline from another state: out-of-state gasoline supplies often don't meet another state's unique environmental regulations. "The segmented market drives up prices; a refiner producing a certain kind of gasoline may have more market power than the competition," Chakravorty says.

Chakravorty presented some preliminary findings on gas prices April 23 in a paper at the annual international conference of the Industrial Organization Society. Titled, "Boutique Fuels and Market Power," his study looks at the effects on gas prices of two specific types of regulation: the reformulated gasoline program and the oxygenated fuels program.

"There's a trade-off," says Chakravorty of the existing marketplace. "It's desirable to have different regulations in various states because of differing environmental conditions." The Clean Air Act is aimed at cleaning up the nation's environmental trouble spots, which means some regions need more stringent rules than others.

Still, there is growing interest at the national level in harmonizing regulations to increase market competition. That's why studies such as these are necessary, he says. "We're trying to estimate the cost of these regulations, so that policy makers can use the information to help reach a balance between clean air and lower costs at the pump for everyone."

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