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Wednesday, October 18, 2006

Gas tax increase

Steven Mufson, in the October 18, 2006 edition of the Washington Post, wrote an article regarding the suggestion of raising the gas tax.

There are many issues of discussion in this article for sure, but one paragraph that grabbed my attention stated, in regards to curbing the US dependence on oil was:

“The report listed three approaches: raising gasoline taxes; setting tougher automobile fuel-economy standards; and imposing a nationwide ceiling on gasoline consumption, with people allowed to buy and sell rights to use more than their annual allotments.”

Economically there is nothing wrong with the suggestion of raising taxes. Graphically we can show that this will likely, in the long run, reduce the quantity demanded for gas. This in turn will reduce greenhouse gases and other pollutants and if the tax is set at the correct amount it would capture all the externalities associated with gas consumption.

Automobile efficiency in itself would certainly seem to be a good solution as well. More efficient vehicles equates to lower demand for gas. We again get the reduction in emissions. But how long will it take for a noticeable increase in more efficient vehicles to take? How old is your car?

As to the ceiling on consumption I am not sure. A ceiling seems like a bad idea – the emergence of black markets and underhanded techniques to circumvent such restrictions springs to mind. Is the market acting efficiently when a ceiling is in place! I do not see how the buying and selling of allotments would achieve anything different than the status-quo. If I sell half of my gas to you, (which implies you will use the gas), then isn’t the net consumption of gas unchanged? Now, if we are buying and selling pollution credits then that is a different argument, but that does not appear to be the suggestion.

It seems that a raise in the gas tax is the best economic solution. So why does it not occur?– Do I even have to mention the “P” word!

"It seems that a raise in the gas tax is the best economic solution. So why does it not occur?– Do I even have to mention the “P” word!"

As you point out, increasing the tax on gasoline does fit our externality model. But, you may be missing something. There already is an excise sales tax on gasoline, both at the national level and at the state level. I think this suggests an obvious question: How close is the existing excise tax on gasoline to the MEC of burning another gallon of gasoline? In most states, I think the excise tax is between 40 cent and 50 cents per gallon. Could it be than an excise tax of that amount already internalizes the negative externalities?

You may also be missing something with respect to government coercing an increase in fuel economy. People use gasoline to get from here to there. Gasoline is an input to this process, and that means gasoline is not valued itself as a consumption good. The consumption good is getting from here to there. Think about the demand for trips from here to there. An increase in fuel economy seems to me to mean a decrease in the price of getting from here to there. When price decreases, what happens to quantity demanded?
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