Pigovian Gasoline

Posted: March 18, 2014 in Uncategorized

Earlier we explored the idea of a pigovian tax and how it can help to compensate for the externalities of some output in the market. In this post I want to look at how this could be used in the form of a gas tax and some of the externalities that could be accounted for.

So obviously this would mean that we are trying to increase the price of gasoline at the pump by increasing the tax on that gas. We currently have a very small tax (in the US) relative to most of the world. For our purposes here, I am not proposing any specific rate and the way in which we would transition the implementation, but rather just look at the potential impacts that the increase could have. Our assumption is that with the increase in price, we would have a decrease in the amount of driving vehicles, and/or see a transition in the type of vehicles manufactured and purchased.

Environmental benefits. In either case, whether we drove less total miles or bought more fuel efficient cars, the environment would see fewer emissions of carbon dioxide, at least from vehicles. We would most likely see this happen due to different reasons, predominantly from the ones I mentioned earlier, that we would have some people drive less and some people would buy more efficient cars and a combination of the two.

We most likely see some regulatory benefits as well. Increasing the gas tax is fairly simple and would not take much in the form of bureacratic control. I think it plausible to think that CAFE regulation could become obsolete and so we could save the government spending for that administrative cost. The tax would provide some revenue and decrease total administrative cost of government regulation. This change in “available” spending could be shifted to more pertinent aspect of our federal budget.

Another benefit, which may be more of an indirect benefit as the assumption would be that pigovian taxes would be used more often, would be a potential for economic growth due to lower income taxes. The idea would be that we could reduce income taxes if we increased the utilization of these consumption taxes. This idea can be debated, but it is certainly a valid concept that deserves thought. Check out this link for some input about the income v. consumption tax idea.

This is not an exhaustive list of possible impacts from a pigovian gas tax, but I think it provides a good initial understanding of how to think of it. We could also take this to look at some of the unintended consequences of this system, which will be for another post. To finish, take a look at the picture and think about that questions. What was your initial association to the question? Did you have more than one? I think it is a great image to generate some real thought into the issue. If after thinking about that question you have some valuable insight, post a comment about it. I’d be interested to see the input.


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