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