Build It, But Will They Come? Evidence from Consumer Choice Between Gasoline and Sugarcane Ethanol

How motorists might switch from gasoline and  diesel to alternative energy sources is not known, since the availability of  alternatives is currently very limited. To bridge this gap, we exploit recent  exogenous variation in ethanol prices at Brazil's pumps and uncover substantial  consumer heterogeneity in the choice among century-old gasoline and a  less-established---but still widely available and usable---alternative,  sugarcane ethanol. We observe roughly 20% of flexible-fuel motorists choosing  gasoline when gasoline is priced 20% above ethanol in energy-adjusted terms  ($/mile) and, similarly, 20% of motorists choosing ethanol when ethanol is  priced 20% above gasoline. We use transaction-level data to explore  "non-price" characteristics which differentiate the two goods in the  minds of different groups of consumers. Our findings suggest---and a  counterfactual illustrates---that switching away from gasoline en masse, should  this be desired, would require considerable price discounts to boost voluntary  adoption, in the US and elsewhere.

Speaker: Alberto Salvo, Northwestern University