Gasoline, Taxes, Public Goods, Secondary & Tertiary Effects

In the April 25, 2007 issue of The Wall Street Journal, there was an interesting article on the impact of fuel-efficient cars on state road budgets.

It seems that as oil prices climb, people opt for more fuel-efficient vehicles. More fuel-efficient vehicles use less fuel, generating lower fuel tax revenues for states. Lower fuel tax revenues make it harder to fund road maintenance and new projects.

Now the easy answer is "raise fuel taxes." But that provides a bigger incentive to more people to move to more fuel-efficient cars (or even public transportation), which cuts down on fuel tax revenues...you see where this is going.

Much depends on how you fund roads. Excise taxes that are based on the number of gallons of fuel (x cents a gallon) sold clearly don't work. Even a sales tax on gasoline (x cents per dollar) would make some sense, although it would seem to decrease demand as price rises (assuming a certain level of elasticity). Another option is converting roads to toll roads and moving toward congestion-based pricing, where the toll is based on the time of day -- higher tolls during rush hour, etc.

This is an interesting discussion topic/exercise for use with your students. How does it work for you?

***Update***
Bill Testa, fellow blogger and head of the regional research group at the Federal Reserve Bank of Chicago, has an interesting post on Congestion Tolling and Privately Operated Roads which can provide more information for you and your students as you discuss this issue. It's very thorough and worth reading as you tackle this topic.

As always, your comments are welcome.

Posted by TSchilling at April 26, 2007 2:06 PM


Comments
I THINK THAT THE PRICE OF GAS IS (ludicrous) AND THAT IT SHOULD BE LOWERED. I ALSO THINK THAT AMERICA WOULDN'T (struggle) AS BAD IF PEOPLE DIDN'T BUY (foreign) CARS.

Posted by: brian at May 7, 2007 12:30 PM

While I can understand your response to the current nominal price of gasoline, the fact is that in real terms (adjusted for inflation) we're still below the prices we paid in early 1980s (1.15 inflation adjusted price today vs. 1.25+ then). As to your other concern, I point out that, according to one source, a Toyota Cienna has more domestic content than a Ford Mustang. It's a matter of how you view things.
Posted by: Tim at May 7, 2007 3:31 PM

Decision-making and Trade-offs at the Airport

I've been traveling a bit the past couple of weeks. This gives me time (way too much actually) to sit in airports and observe economic and seemingly non-economic behavior. In particular I noticed two decision-making opportunities. I'm sure there were many, many more going on around me, but these caught my attention.

The first involved a traveling family - mom and dad and two young boys. To all appearances they had been traveling a good part of the day, and it wasn't over yet. There were two boys, both quite young (I estimate less than six years of age) and they were somewhat cranky. Upon seating themselves in the waiting area, the parents were trying to get their thoughts together for the next stage of the voyage. The boys were trying to go in different directions to see different things, and clearly needed a distraction. One parent pulled out a large sweet treat, which caught their attention.

At this point, I was asking myself, "Had this decision been thought through economically?" By that I mean had the parent considered the longer-term consequences of the choice that was just made? On one hand, the boys quieted momentarily to enjoy the snack. But what would be the longer-term consequence of giving the two young travelers, already wound up either from excitement or lack of exercise, a sugar rush -- especially as they were about to enter an airplane where they would be confined for another period of time (of unknown length if we look at recent news stories)? Was this a "good" decision?

The other decision-making opportunity arose when it was announced that a particular flight was in an oversold position, and the airline was willing to give vouchers for a free round-trip ticket, anywhere that they flew in the continental U.S., if one would only give up his or her seat and agree to fly out on the next scheduled flight (which was one and a quarter hours later). I saw only one person stand up and move to the counter to take the offer. I was trying to make a connection, which precluded my taking advantage of the offer. But of the given manifest of passengers, I wondered how many of us reasonably qualified for the offer. By that I mean, how many of us would not miss flights, meetings, etc. and could take the offer?

I then wondered why there weren't more apparent "takers" on the offer. My guess is that the dollar value of the coupons could equal $400 (or less). And how many would have considered the offer if it were in cash.

Can examples like this be used in the classroom to illustrate how/why we make decisions, and how people weigh their alternatives (and opportunity costs) in a decision-making matrix? Do people actually make "informed" decisions? Your thoughts are most welcome.

Posted by TSchilling at 12:58 PM Comments (0)

Kurt Vonnegut Has Died

Unlike many of my contemporaries, I never went through a period of "absorbing" this author's works. But what little of his I read I enjoyed. I mention his passing however because back in December, 2006, I had posted about his book Player Piano and some of the economic concepts one could explore through that story.

If you're familiar with any of Vonnegut's other works and have ideas on how to tie in some economics, please feel free to share.

Posted by TSchilling at 10:30 AM Comments (0)

Milton Friedman and Personal Milestone

The newest issue of the Federal Reserve Bank of Richmond's Economic Quarterly just landed in my mailbox. At the top of the issue is an interesting article about The Contributions of Milton Friedman to Economics. For those of you interested in the development of economics as a profession, and particularly the move away from strict Keynesian interpretation, I would recommend the article. It is a succinct and interesting discussion of Friedman's work and how it helped change macroeconomic thinking. There is so much more to this fascinating life. (See numerous earlier entries.)

Another readable (and shorter) piece on Milton Friedman can be found in the Federal Reserve Bank of Cleveland's December, 2006 issue of Economic Commentary. Good starting points if you wish to understand the last 30 years of economics.

Finally, this is my 100th entry (according to the blog statistics). It has taken a while, but I hope regular readers (if there are any) have found this to be a worthwhile stop. It is particularly appropriate as Milton Friedman's work played a special role in my development as an economics educator. So we move forward from here. Just a gentle reminder, you can subscribe to this blog by sending an me an e-mail. (My address is at the top of the page.) That way you receive notification whenever I post.

As always, I look forward to your comments.

Posted by TSchilling at April 9, 2007 11:16 AM


Comments
Tim, Congrats on reaching your milestone! This blog is a valuable contribution to the field of economic education and we are grateful for all the great work you do on the blog, in Chicago, and in the Federal Reserve System.

Posted by: Andrew H. at April 9, 2007 2:57 PM

A Matter of Perspective?

There's a very interesting entry over at The Wealth Report blog by The Wall Street Journal. It actually meshes with a column in today's Weekend Journal.

The column and the blog post look at the reaction of students at Palm Beach Day Academy who have read Upton Sinclair's The Jungle. Given their backgrounds, their reactions to the book are interesting. Particularly given the recent post here about economic systems and legos. Again, biases based on experience or values will shape the type of economic systems and institutions we choose to create.

I must admit, I am among the handful of students who never had to read this book, but it is on my reading pile (as high as that is). Given the state of economic knowledge now vs. at Upton Sinclair's time, what lessons can we learn and what lessons might we need to reconsider? Your thoughts are welcome.

Posted by TSchilling at 1:59 PM Comments (0)

The "Other" Great Economist

If pressed to name the great economist of the first half of the 20th century, I think most people with even a passing knowledge of the field might mention John Maynard Keynes. Fewer would mention Joseph Schumpeter. This is interesting because probably as many people are familiar with Schumpeter's phrase "creative destruction" as are familiar with Keynes' bromide about "the long run."

I admit I came to familiarity with Schumpeter late, initially through mention in Robert Heilbronner's The Worldly Philosophers. But I found him interesting and managed to work my way through his last work (finished by his wife, actually), The History of Economic Analysis. Being a student of history first, I can hardly be faulted for finding his call for more historical analysis within economics an appealing idea.

Now there is a new biography about this important but overshadowed figure titled Prophet of Innovation: Joseph Schumpeter and Creative Destruction by Thomas McCraw. (I do not say "overshadowed" to diminish Keynes' contribution. I thoroughly enjoyed Robert Skidelsky's three-volume biography of Lord Keynes, and learned much. But one wonders whether Schumpeter's star would have shone brighter had he published first.)

While I have not read the Schumpeter biography, I mean to and will promise to review it. There is an interesting and readable review of McCraw's book by David Warsh on his blog. If you're not familiar with Schumpeter, I encourage you to first read Warsh's review, and then consider picking up the book.

I'll look forward to your comments when I post my review. Or if you've already read it, please feel free to comment now.

Posted by TSchilling at April 6, 2007 11:04 AM


Comments
I read another good review in the Wall Street Journal yesterday. I thought it looked interesting as well. Please let us know how it goes.
P.S. I love the subscription service with your blog; in case you were wondering how I commented so soon after you posted.

Posted by: Amanda G. at April 6, 2007 11:45 AM

Economics and Music

Back on June 28, 2006, I posted on topic of "Economics and Music" and linked to the Division of Labour site. Well, they've been busy and have constructed an entire page complete with pop songs, lyrics, and assignments. It's definitely worth a visit. I'll also offer my list of pop songs and economic concept. They're yours for the asking.

Any other songs you would suggest?
Thanks again to the folks at DoL.

Posted by TSchilling at April 4, 2007 12:45 PM


Comments
Tim, Thanks for this post. Your list of songs and concepts is very helpful in our work. I used to use a clip of the chorus of David Bowie's "Changes" every time we shifted a demand or supply curve in introduction to micro. I used it for a few class periods in order to emphasize the difference between shifting the curves and simply moving along them. Clips from the Spice Girls' "Wannabe" can be very effective when talking about economic wants and demand since the song repeatedly mentions "if you want". There are so many good things you can do with music to further motivate auditory learners in the economics classroom.

Posted by: Andrew H. at April 4, 2007 1:24 PM


Tim,I love the idea of teaching economics with music. Students really seem to enjoy it when you can bring things like the music they listen to into the classroom. Thanks for posting your own list as well. Although, I have to say, it dates you! Lovin' Spoonful? :)

Posted by: Amanda G. at April 4, 2007 1:42 PM