The Not-So-Strange Impacts of High Gas Prices

News reports have recently started to provide interesting real world examples of what economists have always known: higher gas prices affect the behavior of drivers. Not only are high gas prices causing a dramatic and rapid increase in the use of transit services, but they are also leading drivers to change their vehicle purchasing choices. Although the extent and permanence of these changes are not yet known, these two different effects are interesting indicators of separate consumer decisions. The decision to use transit is a choice that can be made on a day by day basis, if you live in an area with transit availability. If gas prices are high, you can let your car sit and take transit for a few days or weeks, and switch back to a vehicle once prices drop. However, the purchase of a more fuel efficient car indicates a belief that higher gas prices are here to stay for a least a few years – it is a significant investment that goes beyond the choice of whether to take the bus today or not. These changing decisions do not end with car purchases.

If a daily decision can be made about whether to take transit, and buying a vehicle is made with perhaps a 3-6 year future in mind, then the most serious choice consumers make affected by gas prices may be buying a house. This is a decision that is typically in consideration of an even longer time period. Housing decisions are affected by a number of other things besides gas prices, like schools, acreage, and proximity to work, but as gas prices rise and transportation eats up a more significant portion of household budgets, it’s not unreasonable to expect that housing patterns will start to change (assuming that tradeoffs for these other things remain constant). Given the current tumult in the housing market it is hard to see what trends may emerge, but it wouldn’t be surprising to see an increased rate of densification in the following years. Gas prices may be joined by another transportation cost in the near future: variable road pricing. The onset of this additional driving cost could have an even more dramatic effect on land use, vehicle, and daily transportation decisions.

The price incentive to increase the density of land use is not likely to go away, and it may in fact intensify. The ripple effect of high gas costs has not played out in its entirety, but we are certainly seeing some fascinating indicators of how higher transportation costs will alter people’s movement choices and land use patterns.

-Daniel Lewis