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. shanek says:

    I’ll tell you what makes no sense to me: we tax gas, but then we subsidize the oil companies. Taxing gas makes it more expensive, and the subsidies make it cheaper. And in effect, it’s just like the oil companies raised prices, since the consumer pays more and it goes to the oil companies.

    I say get rid of oil subsidies first, and reduce gas taxes so that it’s revenue-neutral (IOW, the reduction in taxes equals the amount no longer spent in subsidies). Then see what happens to the above costs.

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  2. shanek says:

    I’ll tell you what makes no sense to me: we tax gas, but then we subsidize the oil companies. Taxing gas makes it more expensive, and the subsidies make it cheaper. And in effect, it’s just like the oil companies raised prices, since the consumer pays more and it goes to the oil companies.

    I say get rid of oil subsidies first, and reduce gas taxes so that it’s revenue-neutral (IOW, the reduction in taxes equals the amount no longer spent in subsidies). Then see what happens to the above costs.

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  3. egretman says:

    You have so lost this one.

    You are Quixote tilting at the windmills of Reagan conservatism. You are the best example of why guvment should limit voting to only rural white guys. You are fixin’ to be picked apart by the anti-tax gods for foolin’ around with America’s god given right to cheap gas.

    “Eat at Joe’s and get gas”, I always say. It’s the American way. I’m a Texan. Just get off my roads or get out of the way. If you see my hummer in your rear view mirror, just consider it a flag waving tribute to our troops.

    And if you have a bumber sticker that reads “2008 THE END OF AN ERROR”, then you are just a panty waist ignorant liberal probably farting around with dinky hybrids.

    That’s a sin against god, really.

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  4. egretman says:

    You have so lost this one.

    You are Quixote tilting at the windmills of Reagan conservatism. You are the best example of why guvment should limit voting to only rural white guys. You are fixin’ to be picked apart by the anti-tax gods for foolin’ around with America’s god given right to cheap gas.

    “Eat at Joe’s and get gas”, I always say. It’s the American way. I’m a Texan. Just get off my roads or get out of the way. If you see my hummer in your rear view mirror, just consider it a flag waving tribute to our troops.

    And if you have a bumber sticker that reads “2008 THE END OF AN ERROR”, then you are just a panty waist ignorant liberal probably farting around with dinky hybrids.

    That’s a sin against god, really.

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  5. dickgrogan says:

    While I like the idea of using less gas, and while I like laughing at idiots who insist on buying gas-guzzlers, I’ve got that “fresh out of college” new smell to me and an empty bank account to go along with that. I think I can safely assume I feel the pain at the pump a little more than an a certain someone who has a book on the New York Times bestseller list.

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  6. dickgrogan says:

    While I like the idea of using less gas, and while I like laughing at idiots who insist on buying gas-guzzlers, I’ve got that “fresh out of college” new smell to me and an empty bank account to go along with that. I think I can safely assume I feel the pain at the pump a little more than an a certain someone who has a book on the New York Times bestseller list.

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  7. JobyRB says:

    Taxes on gas (petrol) are a blunt instrument for dealing with the negative externality of congestion, although ideal for dealing with the externality of global warming. A driver in an isolated area will cause no congestion but use petrol.

    If there were no privacy concerns, tracking vehicles to see where they went and when, and then taxing them according to how many others were on the same roads would probably be the way to go. Congestion charging in cities and major roads would also work.

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  8. JobyRB says:

    Taxes on gas (petrol) are a blunt instrument for dealing with the negative externality of congestion, although ideal for dealing with the externality of global warming. A driver in an isolated area will cause no congestion but use petrol.

    If there were no privacy concerns, tracking vehicles to see where they went and when, and then taxing them according to how many others were on the same roads would probably be the way to go. Congestion charging in cities and major roads would also work.

    Thumb up 0 Thumb down 0