As petrol prices rise, car use does not necessarily drop

Between February and July this year, unleaded petrol had risen in price by nearly nine per cent while diesel had increased by 15 per cent. When the supermarkets announced a small reduction at the end of July, it may have been seen as some relief to beleaguered motorists, but it only took prices for unleaded back to their May levels. Diesel remained 2.5 per cent more expensive than in May.

Would economists predict, therefore, that we might see a reduction in cars on the road and, therefore, hidden benefits in reduced carbon emissions?

Unfortunately, as an economist, it's hard not to be sceptical about the link between higher costs of motoring and vehicle usage. A recent survey by the AA suggested that some 16 per cent of members were considering reducing their car usage given the high price of fuel. This would make our consumption of petrol relatively price sensitive, or "elastic"—a 16 per cent reduction in demand against a smaller average increase in price.

If only it were that simple: we could solve all our environmental problems by taxing motorists. Unfortunately, official figures suggest that only two per cent of people are actually using their cars less. In other words, demand, far from being price sensitive, is actually pretty insensitive, or "inelastic". The reason why there is always such an outcry at hikes in fuel duty is because we have no choice.

While we might think about alternative means of transport, it does not translate into action. And if we are going to use our cars, then we need fuel in them. And of course, for the government, it makes perfect sense to levy taxes on goods that have inelastic demand, as it increases revenues.