In times like these, with energy prices so volatile, lots of bad ideas get bandied about. Price caps, obviously, are one idea, despite the fact that they have a terrible track record and always lead to shortages. Alex Tabarrok of Marginal Revolution also has an insightful comment about gasoline taxes:
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.
Hmm, hadn't considered that one, but it's elegantly simple. James Hamilton also makes an interesting point on gas taxes:
...But cutting the gasoline tax would give motorists virtually no relief from soaring gasoline costs. The reason is that the high gasoline price is a symptom of the problem, not the cause. The core problem is that we have to face a reduction in the available supply of gasoline. That means that somehow consumers must be forced to use less gasoline. Unless we institute rationing, the way that has to happen is for the total cost of the gasoline to consumers (the tax plus the price received by the seller) to rise high enough to choke back demand. If we reduce the tax but do nothing to increase the available supply, the price received by the seller would just go up by the amount that the tax was cut.
Not much here for the investor, but it never hurts to promote smart economics when most people aren't
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