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.© BrainMass Inc. brainmass.com December 24, 2021, 6:52 pm ad1c9bdddf
SOLUTION This solution is FREE courtesy of BrainMass!
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 sufficient to reduce demand. This resource would then be allocated more efficiently, in the sense that if we used less we would be better off. Over the course of ten years, people would be able to plan ahead and purchase vehicles that consume less gas. Perhaps ethanol would be a viable alternative at some point.
This tax would interfere with the equilibrium price of gas and thus cause a deadweight loss. The tax will raise the price of gas such that fewer trades occur and that the individuals or businesses involved gain less from participating in the market. This destroys value, which is the deadweight loss.
In the long run, the costs of many goods will rise because of the increased cost of gasoline (assuming alternative means of transportation are not developed in time). This will shift the supply curve backward, as shown on the attached graph. This reduces economic output and thus that tax base. Unemployment will rise.
You can also think of the curve S1 as being the private cost to buyers, and S2 is the social cost to society. The most efficient quantity and price are therefore Q2 and P2. Because the market will adjust to S1 without government intervention, the market would be at the inefficient levels of Q1 and P1. Thus the new level of output is the efficient one, although it causes some individual hardship.
The government may gain some revenue from the tax, although not the full amount. This is because declining economic activity will erode the tax base. If economic activity falls too much, the government might take in less than before, even with the gas tax.© BrainMass Inc. brainmass.com December 24, 2021, 6:52 pm ad1c9bdddf>