South-Western College Publishing - Economics  
Killing the Goose that Laid the Golden Egg: Automakers Push a New Gas Tax
Subject Tax on Gasoline to Align Individual and Social Incentives Regarding Fuel Economy
Topic Supply and Demand; Government and the Economy, Economics and the Environment
Key Words

Gasoline Tax; Private and Social Incentives; Fuel Economy; Government Regulation

News Story

While many politicians favor a new gasoline tax to raise revenue and to increase fuel standards at the same time, few have actually introduced measures to do so. Detroit auto manufacturers support a $0.50 increase in the gas tax as a means of instilling greater fuel economy in its automotive fleets.

Detroit manufacturers argue that if the government is really serious about cutting down on fuel emissions, it needs to more closely align individual and social incentives. That is, society as a whole is concerned about pollution emissions from automobiles, but as long as gasoline is as cheap as it is in the US - $1.96 per gallon in the last week of April, compared to $5.19 in Germany and $5.34 in Britain - consumers won't care about fuel economy. They'll simply want bigger, faster cars and thus fuel economy will suffer. Manufacturers argue that current government regulations on fuel economy force the firms to produce cars that no one wants, and bigger vehicles-like SUVs--that escape the regulations are more popular than ever.

Firms point to Europe as an illustration of its point: since 1970, U.S. oil consumption has increased from 14 million to 20 million barrels a day, while consumption in Germany and Britain has actually fallen. Analysts cite evidence pointing to high gas taxes as part of the reason for the European drop in consumption. Consumers in those countries, the firms argue, asked for more fuel efficient automobiles as the price of oil kept increasing.


(Updated June, 2004)

Questions
1.

Assuming an increase in the gas tax similar to what the automakers are recommending, what would happen to the price and quantity of S.U.V.s in the market? Answer using a graph of supply and demand.

2. Why aren't individual and social incentives aligned in the purchases of S.U.V.s and other high-pollution emitting automobiles? Use a graph of marginal benefits and costs to explain the difference.
3. Why do you think politicians in non-election years talk about raising gasoline taxes as a means to raise money, but do not do so during election years?
Source Danny Hakim. "A Fuel-Saving Proposal from your Automaker: Tax the Gas." The New York Times. 18 April 2004.

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