Rational habits in gasoline demand

The dynamics of demand for energy goods such as gasoline are complicated by investment decisions and behavioral habits. Both types of complication can be captured by a habits model, in which past consumption enters into an agent's current utility function. If the agent is forward-looking, or ‘rational’, then habits imply his consumption of the habit-forming good will be sensitive to his expectation of future market conditions, in particular future prices. This sensitivity implies, in turn, that traditional measures of price elasticity will underproject consumers' responsiveness to policy interventions.