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Competitive Markets

In a recent speech, Professor Gregory Mankiw contends that our elected federal leaders should raise the gasoline tax. "Not quickly, but substantially. I would like to see Congress increase the gas tax by $1 per gallon, phased in gradually by 10 cents per year over the next decade. --- Please use the market analysis tool we have learned, discuss the potential impact of the government gas tax. For instance, you can discuss why the free market idea does not work in this industry (or does work in this industry if you disagree that we need government to intervene in this market) in terms of resource allocation. You can also discuss how the proposed tax might change the entry and exit conditions for energy industry, including the renewable energy sources. However, please don't let the above two suggestions limit your thoughts.

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Mankiw advocates the higher tax on gasoline because he believes that the market has failed to create a price for this product that reflects its true cost to society. Gasoline is harmful to us in two ways: it creates a dependence on foreign countries, and it harms the environment. These are negative externalities not reflected in the current price of gas. The true cost is difficult if not impossible to measure. For example, we don't know how much damage global warming will actually do. But a dollar a gallon would be ...