Institute of Transportation Studies at UC Berkeley

Estimating the producer surplus – the revenue above the average long-run cost – is an important part of social cost-benefit analyses of changes in petroleum use. This paper estimates the producer surplus associated with changes in gasoline fuel use in the United States, and then applies the estimates of producer surplus to two kinds of social cost-benefit analyses related to petroleum use: (1) estimating the wealth transfer from consumers to producers as a result of policies that affect oil use and oil imports to the US, and (2) comparing the actual average cost of gasoline with the average cost of environmentally superior alternatives to gasoline, such as hydrogen. Our results show that a 50% reduction in gasoline use in the US in 2004 would have saved the US $72 billion in producer surplus payments to foreign oil producers. Applying our estimates to the comparison of the social lifetime cost of hydrogen vehicles versus gasoline vehicles, we find that inconsistently counting producer surplus from a US national perspective while counting climate change damages from a global perspective can overstate the present value lifetime costs of gasoline vehicles by $2,200 to $9,800 per vehicle.