[Cross-posted on The Agitator.]
Via Don Boudreaux, I find James Surowiecki arguing on NPR for a 50-cent hike in the gasoline tax.
Surowiecki bases his argument on straightforward Pigovian externality theory. Using fossil fuels creates external costs in the form of air pollution and other environmental effects. Since these costs are not included in the price of fuel, drivers tend to drive too much and too often. A tax would internalize the pollution cost, giving drivers an incentive to cut back.
Boudreaux promised to address this issue later, and focused instead on a different flaw in Surowiecki’s analysis. But I’m going to beat him to the punch. The main problem here is that Surowiecki looks only at one potential source of market failure (external costs) while failing to consider another (imperfect competition). According to the economic theory of the second-best, it turns out that when there exist multiple market imperfections, they can actually offset each other – and fixing one can exacerbate the other. Oil and gas are perfect examples. The external cost from pollution means the market price of gas is too low. But the existence of a moderately effective cartel, OPEC, means the market price is too high. These effects at least partially offset each other. It could be, for instance, that the cartel-premium is large enough to effectively internalize the pollution externality. If so, then taxing gasoline would induce drivers to drive too little.
So which of the two effects predominates? I don’t know, and I’ll bet Surowiecki doesn’t either. I do know that 50-cent figure -- on top of the taxes we already pay -- sounds suspiciously like a number he pulled out of his butt.
(I will give Surowiecki credit for this correct point: that if we assume gasoline use should be reduced, taxes are a more efficient means of achieving that goal than mandating fuel economy standards.)