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Is Mankiw’s $2.10 Optimal Gas Tax Correct?

Summary:
In Sunday's post, I noted an important deficiency in Greg Mankiw's treatment of negative externalities and stated that this matters for his treatment of gasoline taxes. Here's why. Greg lists 3 negative externalities associated with gasoline, and says that the optimal corrective tax is .10 per gallon. Here are the three, along with his reasoning for using a gasoline tax for each of the three: 1. Congestion: "A gasoline tax keeps congestion down by encouraging people to take public transportation, carpool more often, and live closer to work."2. Accidents: "According to the National Highway Traffic Safety Administration, a person driving a typical car is five times as likely to die if hit by a sport-utility vehicle than if hit by another car. The gas tax is an indirect way of making

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In Sunday's post, I noted an important deficiency in Greg Mankiw's treatment of negative externalities and stated that this matters for his treatment of gasoline taxes. Here's why.

Greg lists 3 negative externalities associated with gasoline, and says that the optimal corrective tax is $2.10 per gallon. Here are the three, along with his reasoning for using a gasoline tax for each of the three:

1. Congestion: "A gasoline tax keeps congestion down by encouraging people to take public transportation, carpool more often, and live closer to work."
2. Accidents: "According to the National Highway Traffic Safety Administration, a person driving a typical car is five times as likely to die if hit by a sport-utility vehicle than if hit by another car. The gas tax is an indirect way of making people pay when their large, gas-guzzling vehicles impose risk on others, which in turn makes them take this risk into account when choosing what vehicle to purchase."
3. Pollution. "The burning of fossil fuels such as gasoline is widely believed to be the cause of global warming. Experts disagree about how dangerous this threat is, but there is no doubt that the gas tax reduces the threat by reducing the use of gasoline."

Let's look at them one by one.

1. Congestion. Notice that this is consistent with Mankiw's argument for taxing aluminum because the production process for aluminum pollutes. Just as pollution, not aluminum, is the problem, so congestion, not gasoline is the problem. I went to the 2007 Journal of Economic Literature article that Greg cited. It's by Ian W. H. Parry, Margaret Walls, and Winston Harrington.
Sure enough, they backed my point on congestion. They wrote:

Clearly a fuel tax, which raises driving costs for all regions at all times of day, is a very blunt instrument for alleviating traffic congestion, which is highly specific to rush hour periods in urban areas; the ideal instrument is a road-specific congestion toll that varies with time of day.

They later pointed out: "higher fuel taxes will have a disproportionately large effect on roads with minimal congestion and a disproportionately small impact on congested roads."
It's true that they still advocated higher gas taxes to address congestion, but it would be more accurate to say that they "settled" for gas taxes because of current difficulties in getting congestion pricing, difficulties, by the way, that are diminishing with the advance of technology.

2. Accidents. Think about the careful long-distance driver of an SUV who pays a lot of the tax but causes way less than his pro-rata share of accidents. Wouldn't a better solution be to make those who cause accidents more liable, if they are not sufficiently liable now?

3. Pollution. Greg here is not actually discussing pollution in the normal sense. He focuses entirely on global warming. By the way, notice that Greg goes far beyond even most climate scientists who believe global warming is a big problem. He writes that "the burning of fossil fuels such as gasoline is widely believed to be the cause of global warming." He's wrong. Few people believe that fossil fuels are the cause of global warming. Rather, they are believed to be one of the major causes of global warming.
Back to the economics. The reasoning about global warming, even if it's as bad as Greg fears, justifies a carbon tax, not a tax specifically directed at gasoline.

Interestingly, of the six categories of external costs that Parry et al list, greenhouse warming would lead to a 6-cent per gallon gasoline tax. See their Table 2.

David Henderson
David Henderson is a British economist. He was the Head of the Economics and Statistics Department at the OECD in 1984–1992. Before that he worked as an academic economist in Britain, first at Oxford (Fellow of Lincoln College) and later at University College London (Professor of Economics, 1975–1983); as a British civil servant (first as an Economic Advisor in HM Treasury, and later as Chief Economist in the Ministry of Aviation); and as a staff member of the World Bank (1969–1975). In 1985 he gave the BBC Reith Lectures, which were published in the book Innocence and Design: The Influence of Economic Ideas on Policy (Blackwell, 1986).

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