Thursday, July 24, 2008

Are excises on fuel too high?

This provocative post by Gary Becker argues that the low taxes on US petrol completely internalise the external costs of petrol consumption in terms of the global warming and foreign oil dependence externalities imposed on the US.  On this basis, Australian excises on petrol - much higher than US excises - would seem to be on the high side and to go further than you would want in internalising externalities that hurt Aussies.  Thus the Rudd Government's Green Paper decision to exempt petrol from carbon charges by rebating any carbon cost from current excises would seem justifiable.  At least it is not a priori a foolish argument.

Of course Rudd is concerned with the political costs of taxing petrol further when its cost is currently high.  Maybe this is not a dishonourable position either.

Becker points out a host of benefits of high current fuel prices in internalising congestion and other externalities.  He is right. OPEC and China are jointly doing a better job of managing congestion issues in Melbourne than the Victorian Government with their inane fixation on expensive tunnels and extra freeways.

5 comments:

davidp said...

Hi Harry,
The tax point has been raised earlier (maybe by Terje in a comment on Catallaxy or Joshua's blog) - I hadn't mentioned it earlier because I assumed it was obvious (not provocative) as it seems like a point that can be made with a micro 1 diagram.

High prices certainly mean lower quantity demanded and reduce the quantity of the externality (that varies with quantity consumed). But if the high prices are due to other supply shocks (like the cost of producing oil) then they don't internalize the externality.

A tax at the right level may (whether it is called a carbon tax or an excise!) internalize the externality.

cheers

Spiros said...

"OPEC and China are jointly doing a better job of managing congestion issues in Melbourne than the Victorian Government with their inane fixation on expensive tunnels and extra freeways."

The problem is that the congestion is just transferred from roads to public transport. The only way to fix the problem is to get people to make fewer trips or make them at non-peak times.

Francis Xavier Holden said...

The congestion "in Melbourne" is not evenly spread and isn't even in the CBD and inner high net worth suburbs.

I'd like every transport pundit/writer/aca/consultant to publish their home postcode and work postcode. I'm sick of reading the inner suburban lobby buldust in The Age. Sadly the alternative The Hun is only good when there is a gangland killing.

christine said...

Yeah, what davidp said.

The external costs are in addition to the private costs. If the price goes up and consumption goes down, those costs remain unless they are considerably smaller in marginal terms at lower levels of consumption (I can't see much reason why they would be in this case).

Of perhaps there's some desired fixed consumption level which you're trying to achieve through taxation, in which case higher prices do the work for you. Might possibly work for congestion or other cases where there are threshold effects, but again I doubt that's the case here.

Becker says: "higher gasoline prices have already done much of the work in reducing externalities that bigger gas taxes would have done when prices were lower." Which I guess works if you're talking about total externalities. Not necessarily at the margin.

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