Hurray For High Gas Prices!

For a long time I have felt the price of gasoline in the United States was way too low. Pretty much all economists believe this. Greg Mankiw blogged back in October about the many reasons why we should raise gas taxes.

The reason we need high gas taxes is that there are all sorts of costs associated with my driving that I don’t pay — someone else pays them. This is what economists call a “negative externality.” Because I don’t pay the full costs of my driving, I drive too much. Ideally, the government could correct this problem through a gas tax that aligns my own private incentive to drive with the social costs of driving.

Three possible externalities associated with driving are the following:

a) My driving increases congestion for other drivers;

b) I might crash into other cars or pedestrians;

c) My driving contributes to global warming.

If you had to guess, which of those three considerations provides the strongest justification for a bigger tax on gasoline?

The answer, at least based on the evidence I could find, may surprise you.

The most obvious one is congestion. Traffic jams are a direct consequence of too many cars on the road. If you took some cars away, the remaining drivers could get places much faster. From Wikipedia’s page on traffic congestion:

The Texas Transportation Institute estimates that in 2000 the 75 largest metropolitan areas experienced 3.6 billion vehicle-hours of delay, resulting in 5.7 billion US gallons (21.6 billion liters) in wasted fuel and $67.5 billion in lost productivity, or about 0.7% of the nation’s GDP.

This particular study doesn’t tell us what we really need to know for estimating how big the gas tax should be (we want to know how much adding one driver to the mix affects lost productivity), but it does get to the point that, as a commuter, I’m better off if you decide to call in sick to work.

A more subtle benefit of fewer drivers is that there would be fewer crashes. Aaron Edlin and Pinar Mandic, in a paper I was proud to publish in the Journal of Political Economy, argue convincingly that each extra driver raises the insurance costs of other drivers by about $2,000. Their key point is that, if my car is not there to crash into, maybe a crash never happens. They conclude that the appropriate tax would generate $220 billion annually. So, if they are right, reducing the number of crashes is a more important justification for a gas tax than reducing congestion. I’m not sure I believe this; it certainly is a result I never would have guessed to be true.

How about global warming? Every gallon of gas I burn releases carbon into the atmosphere, presumably speeding global warming. If you can believe Wikipedia’s entry on the carbon tax, the social cost of a ton of carbon put into the atmosphere is about $43. (Obviously there is a huge standard of error on this number, but let’s just run with it.) If that number is right, then the gas tax needed to offset the global warming effect is about 12 cents per gallon. According to this National Academy of Sciences report, American motor vehicles burn about 160 billion gallons of gasoline and diesel each year. At 12 cents a gallon, that implies a $20 billion global warming externality. So relative to reducing congestion and lowering the number of accidents, fighting global warming is a distant third in terms of reasons to raise the gas tax. (Not that $20 billion is a small number…it just highlights how high the costs are from congestion and accidents.)

Combining all these numbers, along with the other reasons why we should tax gas (e.g. wear and tear on roads), it seems easy to justify raising the tax on gas by at least $1 per gallon. In 2002 (the year I could easily find data for), the average tax was 42 cents per gallon, or maybe only one-third of what it should be.

High gas prices act just like taxes, except that they are more transitory and the extra revenue goes to oil producers, refiners, and distributors instead of to the government.

My view is that, rather than bemoaning the high price of gas, we should be celebrating it. And, if any presidential candidate should come out in favor of a $1 per gallon tax on gas, vote for that candidate.

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  1. mgroves says:

    Heh. Yeah…no.

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  2. mgroves says:

    Heh. Yeah…no.

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  3. gevil says:

    Hi there,

    I think one of the biggest factors to consider in this case is the price elasticity for gas.

    In my opinion, (and it´s not figure based) is that the higher the gas costs, the better mileage your next car will have. Not the less you drive.

    Here in Brazil gas prices are very high. (comparing with US). What we get here are small cars, with small motors. We usually get a 30-40 miles per gallon car. That without fancy techs and with cheap cars.

    But nevertheless, the traffic is terrible, and in the big cities is not unlikely to have an 2hrs commute.

    Sorry if my english is not perfect, feel free to correct.
    Regards,
    Gabriel
    http://www.donttalkaboutlife.com

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  4. gevil says:

    Hi there,

    I think one of the biggest factors to consider in this case is the price elasticity for gas.

    In my opinion, (and it?s not figure based) is that the higher the gas costs, the better mileage your next car will have. Not the less you drive.

    Here in Brazil gas prices are very high. (comparing with US). What we get here are small cars, with small motors. We usually get a 30-40 miles per gallon car. That without fancy techs and with cheap cars.

    But nevertheless, the traffic is terrible, and in the big cities is not unlikely to have an 2hrs commute.

    Sorry if my english is not perfect, feel free to correct.
    Regards,
    Gabriel
    http://www.donttalkaboutlife.com

    Thumb up 0 Thumb down 0
  5. Deviant says:

    I can’t really complain about low gas prices since I like saving money as much as anybody but I do have to agree with you that our gas prices are artificially low. You’re spot on about the problems associated with traffic and congestion as well as the operation of privately owned vehicles but is it the governments job to adjust prices? I would like to see more of my tax money be used to support increased development of public transportation, hoping that one day it would become more appealing to the average American than driving. But really things such as this are better handled at the state levels of government and lower. There’s no reason for the Federal government to institute a tax on driving that would apply equally to a commuter in LA as it would to a rancher in Wyoming or a vacationing family in Florida. Wouldn’t a better solution be to allow the places where the congestion is a problem to correct fuel prices to accommodate local demand and let the less problematic areas enjoy the benefits of reduced fuel costs? America is a varied and changing country with so many aspects of the population I think our forefathers where correct in instituting a limited federal government and allowing the states to better institute what is best for their population. We don’t need a nationwide $1 gas tax, we need a $3 gas tax in large cities to help develop alternative transports and little or no tax in the more rural municipalities.

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  6. Deviant says:

    I can’t really complain about low gas prices since I like saving money as much as anybody but I do have to agree with you that our gas prices are artificially low. You’re spot on about the problems associated with traffic and congestion as well as the operation of privately owned vehicles but is it the governments job to adjust prices? I would like to see more of my tax money be used to support increased development of public transportation, hoping that one day it would become more appealing to the average American than driving. But really things such as this are better handled at the state levels of government and lower. There’s no reason for the Federal government to institute a tax on driving that would apply equally to a commuter in LA as it would to a rancher in Wyoming or a vacationing family in Florida. Wouldn’t a better solution be to allow the places where the congestion is a problem to correct fuel prices to accommodate local demand and let the less problematic areas enjoy the benefits of reduced fuel costs? America is a varied and changing country with so many aspects of the population I think our forefathers where correct in instituting a limited federal government and allowing the states to better institute what is best for their population. We don’t need a nationwide $1 gas tax, we need a $3 gas tax in large cities to help develop alternative transports and little or no tax in the more rural municipalities.

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  7. Singletoned says:

    The other option, that the UK Government has been considering, is a ‘per mile driven’ tax: http://www.taxfoundation.org/blog/show/533.html

    I think mainly becuase the last time they significantly increased the tax on fuel (to the equivalent of $7.50 a gallon) there were blockades of fuel refineries: http://news.bbc.co.uk/1/hi/uk/924882.stm

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  8. Singletoned says:

    The other option, that the UK Government has been considering, is a ‘per mile driven’ tax: http://www.taxfoundation.org/blog/show/533.html

    I think mainly becuase the last time they significantly increased the tax on fuel (to the equivalent of $7.50 a gallon) there were blockades of fuel refineries: http://news.bbc.co.uk/1/hi/uk/924882.stm

    Thumb up 0 Thumb down 0