Friday, January 2, 2009

Fuel Taxes, Revisited

One of my resolutions this year is to relate my posts to the Powell Center's "Keystone Economic Principles" more clearly. You can find all of them at this link. Today's post relates to principles 1 - 5.
1) We all make choices.
2) There Ain't No Such Thing as a Free Lunch.
3) All Choices Have Consequences.
4) Economic Systems Influence Choices.
5) Incentives Produce Predictable Responses.

Back in early December, 2008, I posted on a story about the Chinese government increasing fuel taxes to fund research and investments into alternative energy. There were some comments received about whether predominantly market economies could do what a predominantly command economies could do. I think they can, but that it's a matter of economic education and making informed choices.

More recently, there have been some opinion pieces calling for higher gas taxes. One of the better ones was brought to my attention by a colleague (thanks, Donna). It's a piece by Charles Krauthammer that appeared in The Weekly Standard. The piece is a well-reasoned and well-written case for the U.S. to increase fuel taxes. And while Krauthammer's objective is more in-line with the "Pigou Club" that Greg Mankiw's been posting about than it is about funding alternative energy research; it still has the benefit of using prices to alter short-term behavior for a longer-term benefit.

Now here is a story courtesy of the Associated Press that indicates a Congressional group is advocating a 50% increase in fuel taxes. So far, so good. The twist on this story is that the money will be used to fund highway construction.

I have questions you could pose to your students after reading these pieces.
1) What are the long-term effects of a) the Chinese plan, b) the Krauthammer proposal, and c) the Congressional group's proposal?

2) What short-term consumer incentives are created and how is behavior impacted?

3) What long-term consumer incentives are created and how is behavior impacted?

I think the last proposal is potentially counterproductive. What's your take on it? I look forward to your comments.


Adam said...

I thought it was very interesting how you started this blog off. On the first day of school in A.P Econ this year, those 5 principles were the first things our teacher tought us and sure enough they deal with everyday items. I do have one question for you though. There is always discussion going on about raising the tax on gas, but when do you think they will occur? And if they occur, how much of a price change should we expect?

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