Gas Prices Are Too Low

So says Eric A. Morris, in a compelling and well-argued Op/Ed piece. At Smash The Mirror, we have argued that gas prices are too low, and that the vilification of the gas tax is unmerited and unproductive. Mr. Morris touches on all of this, and he adds that the gas tax has been withering away for decades and that now is precisely the time to raise it. Continue reading after the jump for quotes and analysis.

Mr. Morris begins by explaining that a higher gas tax would force drivers to bear the costs of their driving that are currently experienced by others (externalities). For instance, someone who chooses to drive makes others suffer pollution and congestion. Much like if some nameless benefactor offered to pay for half your grocery bill, you would probably consume more (quality or quantity), since people do not pay the full cost of their own behavior they choose an inefficient amount or style of driving. One might wonder how much taxation is needed to properly internalize the effects, and Morris addresses this too:

Counting up the true monetary cost of the auto’s externalities is a very difficult proposition, and fuel taxes internalize some of those externalities (pollution) better than others (congestion). But Dubner and Levitt have presented some numbers here. Very roughly, we find that internalizing the auto’s externalities would require a gas-tax hike of around $2 per gallon.

Expressing this as he does in terms of an average of $2 per gallon is problematic, considering that some areas are more vulnerable to congestion than others, and that there is already vast variation in the level of gas tax charged. For now however, it is simplest to take it to be a rough estimate of something that must be examined locally.

There is ample reason then to use a large gas tax, as Miller argues, to fund public transit alternatives that avoid these externalities. Yet the United States continues to use backdoor alternatives like sales tax, which Miller chalks up to politics:

Despite its many charms, the fuel tax is perhaps one of the most resented in our society. If, at a time of concern over global warming, a purported environmentalist like John McCain advocated a gas-tax “holiday,” fuel-tax fans know they’re in trouble.

The really fresh part of Miller’s argument is that he does not just talk about a lack of gasoline tax increases, but about the falling real gas tax:

The irony is that even as the fuel tax is increasingly perceived as a burden, its true bite has been slowly dropping over time. According to Brian Taylor at U.C.L.A.’s Institute of Transportation Studies, California’s fuel tax would have to be increased by about a dollar a gallon to return to the real per-mile rate in effect in the 1950’s.

Inflation is named as one reason, but another less expected one is that while fuel economy improves the pollution situation, it actually makes driving and thus congestion less costly to the people causing it. Rather than use the gasoline tax to change price signals and encourage more socially optimal behavior politicians have chosen to leave it be and raid the budget to fund subsidies for fuel efficiency that are a poor stop-gap.

The result is that efforts to create more responsible driving are competing for funding with public transportation instead of providing the funding. There is a limit to the amount of taxation and behaviorial intervention that is desirable, but given the huge amount of driving related problems, it is merited and should be done in the most efficient way possible. Mr. Miller is right, the United States should immediately and substantially increase the gas tax and use the revenue to improve public transit. As he points out, now is the time to do it: gasoline prices have just fallen, and the recent spike has demonstrated to everyone that they can exceed $4 a gallon without the country grinding to a halt.

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One Response

  1. I like proposals that I hear of a variable gas tax that would keep prices at roughly the same rate, lessening the “uncertainty” burden on the consumer, as well as forcing them to internalize some of the externalized costs of fuel consumption. The only problem with that is the uncertainty moves to local budgets, which typically cannot operate at a deficit.

    I also don’t think we have to fear these low prices as much as those in the 1990’s. President-elect Obama has also touched on the idea that Americans realize that after this summer, we are likely to once again see $4+/gallon gas, so they won’t be as quick to go back to driving large vehicles and commuting long distances. Hopefully, when the economy recovers, people will continue to make the short and long-run adjustments towards a less fuel-intensive lifestyle.

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