Tuesday, September 06, 2005

Supply, Demand, and Gas Taxes

Tyler Cowen has the lowdown:

Ask the man on the street what will happen to the price of gas if the gas tax is lifted and he will reply that the price will fall by the amount of the tax. It's no wonder then that politicians are talking about (temporary) gas-tax relief. The man on the street's answer, however, is wrong. What determines prices is demand and supply. If demand and supply don't change then neither does the price.

Does the lifting of the tax change the demand for gasoline? No. Does it change the physical supply? No. At least not by much in the short run and especially not by much when the tax relief is known to be temporary. Since neither supply nor demand change neither does the price. What does change is that with the tax the government collects the revenues, with the "tax relief" the suppliers of gasoline collect the (former) revenues. Either way, no gain to the consumer.

But, as we've seen so dramatically illustrated throughout this debacle, real solutions are not what government is about. Appeasing the ignorant public so as to remain in power is the true goal.


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