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A monthly archive: September 2005

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       3 Sep 2005       

Subject: Economics     Post Katrina: the need for a gasoline tax

2 Sept 2005:The Need for a Gas Tax

Before Katrina, the U.S. faced a crunch in gas supplies primarily due to a shortage of refinery capacity. After Katrina, this bottleneck got even tighter.

What this means, is that the supply of gasoline (to the entire nation) will be diminished, and there is very little that can be done about it. In particular, increases in the retail price of gas will not induce a significant increase in gasoline supplies (though imports of gasoline may be somewhat responsive to this price increase).

Therefore, the most fundamental principles of economics tell us that something has to give -- demand exceeded supply before, and its even worse now. Roughly speaking this imbalance can be resolved using two mechanisms.

  1. Rationing, either mandatory or voluntary. Drivers just use less gas.
  2. Price increases. When faced with higher prices, many people will choose to drive less.
Since rationing is something Americans rarely use, the simplest response is a price increase. The key point is that as prices increase, demand will diminish. At a sufficiently high price, demand will equal supply. Recollect that due to refinery capacity being maxed out, supply is not likely to increase (at least in any significant fashion) in response to increases in retail price. Thus, this equilibrium price is only responsive to consumer demand.

What this means is that in order for demand to equal supply, consumers must pay this price. Anything less, and demand exceeds supply, and we have gas lines etc. (a form of rationing). If you do not want gas shortages, then consumers must pay this price. Must.

However, it does not matter what makes up this equilibrium price. In particular, it does not matter what fraction of this price is composed of gas taxes. Gas taxes could 0, 10, 50, 80 percent-- the key point is that the conusmer ends up paying the equilibrium price.

That is: in terms of final demand:
Who gets the money spent for gas -- the oil companies or the government -- does not matter. All that matters is that the retail price be at the equilibrium price, be at a price where total consumer demand equals supply.
So, America has a decision: who should get this increase in gasoline prices?
Reiterating, basic economics tells us that we will be paying a high price for gas, a price that is inescapable. This bump in prices can either go to the refineries/oil-companies-etc, or it can go to the government.

There is no escaping this.

  • If the government imposes a tax, the final price paid by consumers will be this equilibrium price.
  • If the government does NOT impose a tax, the final price paid by consumers will be this equilibrium price.
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Posted by Daniel Hellerstein at 11:18:01 Add comment || View 0 comments