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.


mgroves

Heh. Yeah...no.

gevil

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

Deviant

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.

Read more...

Singletoned

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

shanek

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.

egretman

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.

dickgrogan

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.

JobyRB

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.

jeffstier

One potential presidential candidate, (current) New York Mayor, Michael Bloomberg, is pushing hard for congestion pricing. His proposal was considered dead on arrival- but he's picked up significant support in recent weeks.

As a motorcycle rider, I'm hoping motorcycles get an exemption (or major discount), as they are not a cause, but a possible partial solution to congestion.

wk633

As a car-free cyclist, I wholeheartedly agree.

However, before I spout off too much about how my taxes subsidize drivers, I keep in mind that gas fuels the trucks that deliver products to my local stores, so I can ride at most a couple of miles to get anything I need.

My point is that the price of gasoline has far reaching impact. I'm not an economist, so I can't put it in fancy economist language, but I do know that if the price of gas goes up, so does the price of a loaf of bread.

It would be nice if it were practical to have a 'uselessness' tax. So people joy riding around in their Hummers would pay more for gas than people who car pool in a Prius- or who deliver products to stores.

jezsik

I'm in favor of a more realistic gas price because it would lead to more realistic human transportation. The "miles driven" fee is also a plausible idea. I'd add that vehicles should also be taxed by weight; after all, heavier vehicles cause more wear on the roads than lighter vehicles.

This may serve to reduce the congestion, but there's one more tax required: tax parking SPACES. If you can put a car there, you pay a parking tax. More expensive parking makes people think twice about driving. Since the money collected is used for public transportation, there are more options for getting around without a car.

SmilinJack

Thank you for this entry, however unpopular of an idea it might present.

As an "extreme commuter" and someone who lives in the home of the American auto industry, I also think that people in the U.S. pay far too little for gasoline to fuel their automobiles.

Some earlier comments mention how difficult it is when one is just starting out. Well, it always has been difficult. Although I haven't the numbers at my fingertips, the real cost of gasoline, even at $4 per gallon, seems less than the real cost during the mid-1980s.

In most proposals for higher taxes, the social argument generally rests on the government's use of the funds raised. Citing the negative externalaties mentioned -- and I suspect there are additional ones -- the higher costs themselves may provide a social benefit.

nwhitehe

Congestion has more negative externalities than just the actually delayed cars. Think about a commuter who faces a commute with possible delays. She may decide not to make the trip, even though there would have actually been no delay. The uncertainty of the delays adds to the cost.

oddTodd

#3 asks "is it the governments job to adjust prices?"

Yes. That's precisely what the government should be doing: Adjusting prices where the market fails to create the socially optimal outcome. In fact, that is one of the major justifications for having government. That and providing public goods. But not much else.

JSN

I think the point about congestion is well taken. It made me recall a study that was done on a badly congested tunnel in a large city many years ago. By bunching the the cars (they held them for 30 seconds or so with a stop light) the average speed in the tunnel was vastly increased and because the car engines were operating more efficiently they were able to show there was a dramatic reduction in air pollution. They had no way to measure the change in fuel economy but no doubt it was also improved.

I have often wondered if bunching would work as well on a congested highway.

We drove in Scotland last year when gas prices were the equivalent of $7/gallon and I don't recall seeing worse congestion in any city in the US.

MikeWebkist

it does get to the point that, as a commuter, I'm better off if you decide to call in sick to work.

Doesn't all of this talk of gettingg other people off the road assume that they are not actually contributing to our national productivity? Those other drivers are not just running laps around the beltway. Presumably they're driving to work or going shopping or delivering pizzas or whatever. Wouldn't forcing those people off the road be ilkely to *reduce* productivity by making whatever they were doing more expensive?

econ2econ

I agree with #5. The real solution would be to allow gas prices to be the real market price. This would allow prices to move more freely with supply and demand. I've often said we should let gas get up to $8 a gallon. It's the only real way to get people to change their behaviors, whether it be driving less, buying more fuel-efficient cars, etc. And it would also push auto makers to provide more fuel-efficient vehicles as demand rises, and push business to demand alternative fuels.

wtanksleyjr

There's a problem with the logic here. Congestion and accidents are not externalities. The costs for both are borne by the same people that create them. Thus, the system already takes them into account.

A solution that treats them as externalities is not going to work.

(Global warming IS an externality.)

There definitely is a skewing force on the market created by the oil subsidies (and by other taxpayer money spent on oil...).

"That's precisely what the government should be doing: Adjusting prices where the market fails to create the socially optimal outcome. In fact, that is one of the major justifications for having government."

WHAT? Major justification? Since when? Government fiat is the worst way to set prices available! The *major* justification for government is a stable framework of laws in which a market can operate.

jdshipley

What effect did the most recent increase in gas prices have on congestion? And MikeWebkist is right: What percentage of travelers are in a non-productive venture?

Mack

Because gasoline is so volatile (joke), it's difficult for the market to make longer term adjustments.

Rather than a fixed tax on fuel, it might make more sense to have a floor price of, say, $4 a gallon, in effect a variable tax that fixes the price.

When consumers know that they'll be paying that price for the foreseeable future, the incentives to adopt savings measures become stronger. Of course any interference in the market is going to have unintended consequences.

There are already several such distortions. Consider NIMBY. A big factor in gas prices, bigger than oil supply itself, is refinery capacity. We're bumping up against 100% all the time now. Why hasn't the market responded by providing more refineries? Mostly NIMBYism.

So the available solution to capacity problems is a reduction in demand. But we can't do much in the short term to affect demand -- people have the cars they have, and drive the same distance to work. Rapid fluctuations in price don't send a strong enough signal into the long-term decision making process.

This will never happen, of course. But it's fun to speculate.

Read more...