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Saturday, December 15, 2007


City Sprawl and Gasoline Prices

I have recently been thinking about the relationship between gas prices and real estate. An obvious question is whether such a relationship exists in the first place and if so- what is the relationship? Here is the way things seem to work. Suppose we are measuring the quantity of gasoline on the x-axis and the quantity of everything else on the y-axis. Theory suggests that an increase in gasoline price will rotate the budget constraint line (BCL) around the y-axis, decreasing the distance between (0,0) and the x-intercept (that is, the point where the BCL intersects with the x-axis), leaving everything else constant.
However, we can objectively agree that when gasoline prices go up, consumers have less disposable income to spend on everything else. An important point to make: it would most likely be represented as a parallel shift (a decrease) in the consumer budget constraint line on an indifference curve mapping.

Given that the demand for gasoline is quite inelastic in the short run, in the long run consumers will be more likely to switch to alternative means of transportation such as public transportation in densely populated metropolitan areas. But what about cities like Colorado Springs where public transportation grids are not as dense? Given that sufficient gasoline price increases will significantly affect consumer budgets, a family that might have otherwise moved out away from the core of the city to the city outskirts may defer doing so due to anticipated high costs of commuting. That leads to my question: is there a tradeoff between the gasoline prices and “horizontal” growth rate of cities? Do high gasoline prices cause less sprawl? If yes, how can we conclusively measure it?

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