Spatial Differences in Price Elasticityof Demand for Ethanol

Increased public environmental awareness, concern for national energy security, and high transportation fuel prices have all served to heighten interest in alternative fuels. A fundamental issue influencing economic viability of the ethanol industry is understanding consumers’ demand responsiveness to both gasoline and ethanol price changes. In this paper we present an alternative approach to studying this problem by estimating geographically varying price elasticity of demand for E85 ethanol fuel across the study area. This is a departure from previous studies of ethanol demand, in which price elasticity of demand is spatially identical. Considering spatial heterogeneity in household composition and demand preferences, using stationary estimates to explain price-demand relationships over a large geographic area may lead to biased results and inference. Resulting price elasticity estimates for ethanol demand revealed significant geographic variation (ranging from 0.5 to 5.0), suggesting that use of spatially disaggregated data provides more detailed empirical results and, therefore, a more thorough understanding by policymakers.