Is Mankiw's $2.10 Optimal Gas Tax Correct?

“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.”

Doesn’t this quote say pretty much exactly what you say it doesn’t? He talks about fossil fuels, of which gasoline is just one that he is focusing on.

Overall, I think a gas tax isn’t perfect for any of the externalities he lists, but I think it is usually one of the better available options. Congestion pricing has major privacy concerns in application, so that seems out. Large vehicles beyond the damage they do in an accident, also do disproportionate damage to the roads per mile driven, and while weight and fuel economy are not perfectly aligned, the correlation is pretty high. And lastly, a gas tax that is aimed at reducing global warming is just one form of a carbon tax. You should definitely also tax the other forms of carbon pollution as well so that there isn’t some specific incentive to substitute coal power for gas, but that doesn’t mean that the carbon tax on gas isn’t a gas tax.

ChacoKevy, if you assume the minimum insurance is reasonable compensation for injuries and the insurance market is competitive then insurance will charge higher rates at a price set by the market eliminating the externality.

This is a better solution because it’s durable in the face of change. Even if today there’s a correlation between fuel consumption, weight and liability that won’t be the case indefinitely.

Once someone creates an electric SUV the externality returns. A Tesla Model X weighs 5200 lbs, a GMC Suburban weighs 5500 lbs and a Toyota Corolla weighs 2800 lbs. The fuel tax is now broken, unless you think it’s a good idea for middle income gasoline SUV drivers to subsidize affluent electric SUV drivers.

Taxes on externalities need to think in terms of equilibriums not the disequilibrium at the introduction moment of the tax. The new equilibrium may include changing behavior, or sustaining behavior with a different product.

What about the positive externalities of driving? I’m really tired of mainstream economists who think only negative externalities exist. They should add the positive to the negative and report the net.

And what about the negative externalities of a gas tax? With a fixed stock of money, people would have to cut back on spending in other areas to pay for the tax.

@David. I have a technical question about Pigouvian taxes as applied to gasoline.

Assume, in arguendo, that we agree with Parry et al that the fuel related external costs for gasoline are a total of 18 cents/gallon and we limit our analysis to only fuel-related costs (i.e., we assume a separate mileage tax).

Now, we _already_ have specifically directed excise taxes on gasoline. At the Federal level, it’s 18.4 cents/gallon. In California, it’s 27.8 cents/gallon, for a total of 46.2 cents/gallon.

So we have a specific tax on gasoline that’s higher than the fuel related external cost. My understanding of the logic of Pigouvian taxes is that this implies our gasoline taxes are currently too _high_ if we want to achieve the socially optimal consumption of gasoline (again, limiting our analysis to fuel-related external costs).

Do I have this right?

I have no idea how Mankiw came up with $2.10 but I know he did it wrong unless he took into account some estimate of consumer surplus with and without the tax.

For example, say I make $100 per day and spend all of it on a daily consumption bundle (gas included) for which my willingness to pay is $200. Suppose after the tax goes into effect, my total taxes paid to the government increase by $40 which the government spends on something that I value at $10. I reduce my personal expenditures to a smaller bundle that I value at $125 dollars. These numbers are just an example to illustrate how to set up the problem.

Now in order to be welfare improving, the reduction in negative externalities from my reduced driving would have to be greater than the reduction in consumer surplus that I experience after I adjust to the tax.

Since Mankiw has no way to know how much consumer surplus anyone would lose from having to pay the gas tax, or how much anyone really values the way the government would spend the money, I do not see how he can claim to know what level of gas tax is optimal.

@David. Cool. I’ve always thought so and it’s nice to know that a practicing economist agrees.

Another point that I try to explain in these debates is that it’s very important to get these social cost estimates as accurate as possible.

Some people seem to believe that it’s desirable to “err on the safe side” of a larger social cost estimate. Obviously, as a theoretical matter, this is wrong for economic efficiency.

Moreover, we’re actually talking about a practical cost in _lives_. The desperately poor are especially vulnerable to energy prices. At the margin, higher cost energy results in statistical deaths and fewer QALYs in such populations. I once attempted to find literature quantifying the relationship, but was unsuccessful. If you run across any, please post it.

It would be nice to overcome the psychological bias towards “doing something” with a concrete estimate of people that could be killed by overly aggressive attempts to reduce fuel consumption. Kind of like pointing out that the CAFE standards statistically kill people by forcing manufacturers to build lighter weight vehicles.

I’m going to presume that I am much more likely to die if hit by an 18-wheeler than by a one seater smart car. Or even a compact car than a tiny smart car. My question then is not whether bigger vehicles are more lethal when in accidents (that seems obvious) but if bigger vehicles are in more lethal/serious accidents than small cars are.

@mariorossi,
To be honest, I am a bit confused on why this is an externality though. If you are liable for the damage you cause in an accident and that liability is the base for your insurance premium, why is it an externality?
Again, a good point. That’s why I wrote:
“Wouldn’t a better solution be to make those who cause accidents more liable, if they are not sufficiently liable now?”
Note that I left open the possibility that they are sufficiently liable.

justifies a carbon tax

I don’t see that. I am not sure a pigovian tax is ever justifiable.

Any time I see something like that, I wonder what Coase’s response would be.

MikeP,

Of course you had problems getting it across, you were arguing with Neu.

I am not sure a pigovian tax is ever justifiable.

It does take a great leap to accept a Pigouvian tax, as evidenced somewhat in that thread. Somehow the collected tax monies have to actually disappear from all sight — be laundered, if you will — in order for it to meet the Pigouvian objective. For if we watch the collected tax we might see it being rebated exactly to those who paid it, or we might see it being used 100% to climate change damage remediation, or we might see it paid out as a dividend to all in order to buy the votes to keep it alive. Surely each of those has a great and very different impact on economy, environment, and policy.

Any time I see something like that, I wonder what Coase’s response would be.

My best guess for the eventual resolution of the greenhouse gas problem is that sometime in the next few decades the technology will be developed to allow industrial scale sequestration of atmospheric CO2 at a cost lower than the social cost of carbon. Think great belts coated with nanoparticles that capture CO2 in the light and release it in the dark churning all day long in the desert. Or biotechnology that builds fuels out of atmospheric CO2 using solar power.

At that point the whole problem can be solved by Coase. Each producer of CO2 must pay a reducer of CO2 to remove the equivalent CO2 from the atmosphere that the producer emits. The costs of sequestration will only get lower as technologies improve, and the social cost of carbon in the atmosphere will only get higher as humanity gets wealthier, so this will rapidly become a bargain and a minor expense in what is otherwise business as usual production of energy.

The concept of fuel taxes equalising the differences in “harms” done by heavier vehicles is nonsense. States already do this by imposing a tax directly upon the heavier vehicles through registration and “use tax” fees. Further, my insurance company has used their actuarial tables to determine the “risk of damage” factor my vehicle imposes doe to its increaded weight. They use those same tables to calculate their theoretical risk exposure based on my driving history (perfect for the many decades and some two million miles I’ve driven), mostly cancelling out the theoretical risk of greater damage in case of a crash, which I’ve NEVER been involved in.

FUrther, my heavy vehicle gets far better fuel economy than others in the same weight class… the fuel tax “unfairly” burdens drivers of similarly heavy vehicles that get poorer mileage.. the same exact body/chassis I have, powered by a different engine, will use up to twice the fuel mine does. Why penalise THEM and let ME skate? (I’ll take it.. part of why I INSISTED on the powerplant fitted to mine).

But my REAL beef with turning to higher fuel taxes to “cure” so many of the issues such as maintaining/building highways is this: I drive a lot, and see some form of constructionmaintenance on nearly every trip. As I observe these worksites, and the rules, requirements, etc, for tem, I see SO MUCH WASTE>…. cubic tax money squandered in stupid senseless ways that produce NOTHING except to force the expenditure of far more man hours then needed to get the job done. I am also well aware that ANY publically funded constructioin project mandates “prevailing wage” be paid to all workers, and even requires considerable “make work” for the contractor to verify/prove that such wages were actually paid to all involved. Thus a young kid pushing a broom or picking up scrap/waste MUST be paid a minimum of $36/hour (my state), AND there are many rules imposing specific requirements to “employ” so many to fill unneeded positions. This is one more “benefit” of union jobs, the union promotes rules that result in employing far more workers, AND restricts what any given worker can do… a guy who operates a backhoe CANNOT hop off his machine and use his hands to pick up a rake and use it for a few seconds to do something the machine cannot readily do. No, the operator MUST sit, idling the machine, call for a different class of worker who is “qualified” and “allowed” to go find a rake, saunter back over next the backhoe, scratch the dirt as needed, thenn saunter back out of the way to let the ‘hoe operator finish his task. I’d say fully thirty percent of the billed man hours on highway construction projects are “padding”, and each one at a minimum of $36/hour before benefits/taxes/costs (closer to $50 hour in total). I’ll also mention the mandating of miles of orange plastic fencing installed that does NO benefit, and most often gets left behind polluting the counryside long after the jog is “done”, or the stationing of State Police with their cruisers, blue blinking lights flashing away while they read a book or surf the net on the in car laptop, adding about $150 per hour each to the total cost of that job.. last night on a hundred mile trip I noted THREE such trough sloppers…. let’s see, $450/hour times a ten hour duty is close to $4500, PER night….. a 30 day project wastes $135 THOUSAND.. not counting overtime/night duty pay.

When THESE types of waste are addressed, THEN we can think about increasing the tax on motor fuel.

Greg should visit France where about 60% of a litre of fuel is tax of some form. Cars are very small by American standards and car ownership per household is far lower than for American households of a similar income level.

Despite the high tax, regular roads in and around Paris are very congested at peak times. By contrast – France’s network of tolled motorways – are generally clear.

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.

In 20-30 years, virtually all travel with by autonomous vehicles. This will strongly promote “transportation as a service,” wherein people will not own their cars (and therefore have their cars sit depreciating for 20+ hours every day), but will instead pay for cars the way we currently do for airline tickets.

With autonomous vehicles owned by fleet owners, it will be possible to know essentially where every car is every second of the day. This will allow extremely “intelligent” tolling of every single road.