TAG | market failure
I have no idea who I am voting for in this upcoming Presidential election, but I’m certainly looking more favorably upon Barack Obama after reading his reactions to John McCain and Hillary Clinton’s populist attack against gas taxes. From the New York Times:
Senator Hillary Rodham Clinton lined up with Senator John McCain, the presumptive Republican nominee for president, in endorsing a plan to suspend the federal excise tax on gasoline, 18.4 cents a gallon, for the summer travel season. But Senator Barack Obama, Mrs. Clinton’s Democratic rival, spoke out firmly against the proposal, saying it would save consumers little and do nothing to curtail oil consumption and imports.
I wholeheartedly agree. And so does one of today’s brightest economists, Greg Mankiw:
I don’t know any prominent economist who favors this McCain-Clinton proposal.
First, we have to realize that the increased gas prices are, although inconvenient in the short run, somewhat of a blessing. People are quickly starting shift away from driving larger cars, which will lower gasoline consumption in the long run. Additionally, if gas prices remain high for a long period of time, economic theory tells us that people will start taking larger actions to lower their gas prices, such as telecommuting or living closer to where they work. Additionally, this shifts more demand toward alternatives to gasoline-powered vehicles, such as electric cars, that don’t pollute and are by nature more efficient per mile than gasoline cars.
But all in all, we shouldn’t be thinking about suspending gasoline taxes, we should be thinking about increasing them. Although gas prices are high, the consumption of gasoline creates large externalities, which is a market failure that should be corrected through taxation. Additionally, by taxing gasoline at a higher rate, we could offset the income tax and payroll taxes. So overall, we could stop taxing people from doing a positive activity (working) and start taxing an activity that creates a negative externality instead.
(hat tip on this post: Greg Mankiw’s Blog)