Sunday, June 18, 2006

Rising Gasoline Prices

We all know that gasoline prices have been rising over the last year or so. We also know that when you ask an economist why gas prices have been rising she'll say that it's all supply and demand. Some analysts will point to the rising price of oil and environmental regulations regarding the various blends of gasoline that are required for various parts of the country that make it more costly to supply gasoline. Others will point to American driving habits--our penchant for driving big SUVs and the lack of a well-developed public transport system--that lead to rising gasoline demand. See here for a tongue-in-cheek explanation of rising gasoline prices.

My question is this: given that both supply and demand factors have been changing over the last couple of years, how can we determine which set of factors has been the dominant cause of the rising gasoline prices? What information regarding the market would you look to answer this question? (Hint: Review your answer to Aplia's Question 5.3 from Chapter 3, Problem Set II.)

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