DO AMERICANS CONSUME TOO LITTLE NATURAL GAS? AN EMPIRICALTEST OF MARGINAL COST PRICING

This paper measures the extent to which prices exceed marginal costs in the U.S. natural gas distributionmarket during the period 1991-2007. We find large departures from marginal cost pricing in all 50states, with residential and commercial customers facing average markups of over 40%. Based onconservative estimates of the price elasticity of demand these distortions impose hundreds of millionsof dollars of annual welfare loss. Moreover, current price schedules are an important pre-existing distortionwhich should be taken into account when evaluating carbon taxes and other policies aimed at addressingexternal costs....