Catsix,
Go look up the term “externality” in an economics textbook (or maybe you can try the web, I don’t know) and then come back and join the debate with some understanding about what we are talking about.
Actually, there is still a fair bit of debate about this issue, and especially the broader issue of the impact of CAFE standards on traffic fatalities (as CAFE standards can lead to other changes besides lighter cars). In fact, the NAS report on the CAFE standards contains a very well-written appendix containing the “dissenting opinion” of two of the authors of that report from the majority view of the committee on the subject of highway safety and CAFE standards: http://books.nap.edu/books/0309076013/html/117.html#pagetop
Also, I think it is quite disingenuous how the automobile manufacturers trot out this argument when it comes to CAFE standards. While their concern for our safety is certainly touching, it is important to remember that they had to be dragged kicking and screaming into making various safety improvements in automobiles…improvements by the way, that have resulted in a large drop over the years in fatalities per vehicle mile since Ralph Nader first put them on the hot-seat with his book “Unsafe at Any Speed” circa 1965.
[See http://www.publicpurpose.com/hwy-usfatals57.htm ] There is still considerable room for further improvements too.
catsix, let me try and explain why in the actual practice, the US can be said to be subsidizing fuel use by not taxing it enough.
Let’s say I purchase a gallon of gasoline for $1.00 and there is no tax on that. I then burn the gasoline for some purpose and my burning that gasoline then causes $2.00 worth of pollution. Society has just subsidized my use of gasoline to the tune of $2.00, as that is the cost that society as a whole will pay instead of just me. As a result, I will likely use more gasoline, since I am not bearing the full financial burden of my gasoline use.
To correct this market failure, the government could charge a tax of $2.00 on each gallon of gasoline purchased, bringing the total cost up to $3.00. That would make the demand for gasoline more in line with the true costs, thus correcting the failure.
Here is the problem with accusing the government of subsidizing gasoline use in this way (although it probably is) - it is nearly impossible to quantify the cost of pollution coming from gasoline use. So many other factors come into it, that it’s nearly impossible to find the proper amount. The US may actually be charging the appropriate amount of tax to correct for the externalities (although I strongly doubt it) and European states may be causing a different sort of market failure by overtaxing.
Again, I doubt that is the case, but that is the problem with accusations of passive subsidies like this. Externalities are very difficult to quantify many times. We should just stick with saying the US charges less tax than Europeans or Europeans charge too much tax resulting in the differences in fuel consumption and leave it at that.
On the subject of CAFE standards resulting in smaller cars, I doubt that since Ford has a hybrid-engine SUV coming out in the next year or two that gets 40mpg. Well above the proposed CAFE of 30-something. Not only that, the auto companies could still produce 12 mpg behemoths if they converted more of their standard cars to hybrid engines thus increasing fuel efficiency in the rest of their fleet and offsetting the SUVs.
The CAFE should have been raised, and it really angered me to see it shot down with arguments that are distortions and outright lies.
Ok, see, your argument for how it’s ‘subsidized’ requires me to believe that there actually is some quantifiable cost that the government is paying to rectify pollution.
Unless there’s a giant cigarette filter up there taking in all of the byproducts of burning hydrocarbons, I really don’t buy that they’re paying anything more than a very negligible amount on ‘cleaning the pollution’.
They clean pollution when an oil tanker wrecks and spills its payload - and then they fine the oil company to recoup the costs of the cleanup.
The rest of it seems to be a misguided idea that the price of something should artificially exceed its value here just because it arbitrarily does ‘somewhere else’. You could say I’m dependent on gasoline, and that I’ll pay whatever I have to, but that’s not entirely true either.
Is it worth $1.29/gallon to me? Yes. $2.00/gallon? Only to go to work. $3.00/gallon? Going on the welfare ticket is lookin better.
As for this being a ‘market failure’, I don’t consider it one. This is a producer making a product for a price the market will bear so that the purchaser gets utility and the producer gets money. I’m not into an economic strategy by which the government heavily regulates the price of products artificially, and whether or not you agree with my economic ideas, you will have to accept something.
That I won’t kiss the government’s hind end for not being a socialist, heavy handed regulator of the market and charging me taxes to the point that it’s more expensive to have a job than to be unemployed does not in any way mean I lack the capacity to understand economics. Subtly calling me stupid or ignorant is not going to cut it.
[QUOTE]
*Originally posted by jshore *
… http://books.nap.edu/books/0309076013/html/117.html#pagetop
By the way, if you want to read the majority’s view on safety and future CAFE standards, it starts on p.70 of that NAS report. Their basic conclusion is also that the issue is very complicated but that they believe there would probably be some small safety penalty due to downsizing of vehicles, unless the CAFE standards specifically targetted the largest, heaviest vehicles in which case a reduction in the weight variation of the vehicle fleet could have offsetting positive effects. (They also note that vehicles need not be downsized to significantly improve fuel economy, but manufacturers may still do this for economic reasons.)
Another interesting point that they make is that the effect of the 55 mph speed limit in traffic fatalities appears to be greater. So, given puddleglum’s concern about safety, I expect to see him starting a thread in favor of going back to the 55 mph speed limit. I may not hold my breath though! 
Hmmmm…I tried to be patient and explain the economics behind it clearly, catsix. Unfortunately, it seems that jshore was correct in his original assessment and advice to you.
Just because the government isn’t spending money to clean up air pollution doesn’t mean that it doesn’t have a cost. The cost is manifested in higher instances of respiratory disease and so on and so forth.
That said, you obviously don’t understand the concept of externalities and would suggest you go take an Intro to Microeconomics course at the first available opportunity.
You are still missing the point here, catsix. The point is that pollution is imposing a cost not just on the government but on other people. And you don’t consider it a market failure because you don’t understand the assumptions under which the price of good represents its correct price. It strange how many people believe in the market system without understanding it and thus actually don’t believe in it as a science but rather as a perversion into some sort of religion.
The whole idea behind the price being correct is predicated on the notion that all the costs are internalized by the buyer and seller so that costs are not being passed on to 3rd parties. The classic example is a beer company that pollutes a river so that the people downstream who like to say fish or swim in the river suffer. If the company can do this with impunity, then the price of the beer will not reflect these costs (to the people not living on the river). Unfortunately, externalities even exist in cases where there is not a net transfer from one person to the other but when the cost is not absorbed directly in proportion with the use of the product.
In this way, for example, people who drive around in gargantuan SUVs are being subsidized by the rest of us just as plainly as people who are on welfare. In fact, it is worse in the sense that it is more insidious and these people can thus go around feeling that they are being ripped off by “welfare bums” when they are in fact ripping us off.
All that being said, I agree with Neurotik that these external costs are hard to quantify. However, I don’t think it is impossible to get an estimate of their magnitude. If it is large enough then it is better to correct these (through a carbon tax for example), even erring on the side of undercorrecting than to just throw up one’s hands and not try to correct at all! I’d gladly take gasoline taxes at the low end of the spectrum of what it would take to correct estimated externalities! [To put it another way, do we know whether gas should be taxed up to $3.00 per gallon or $6.00 per gallon? Probably not. Do we know that it should be taxed considerably more than it is today? Yes.]
Here’s a good background article discussing the Kerry CAFE standards proposal: http://www.nytimes.com/2002/03/07/business/07FUEL.html (By the way, McCain did vote with the Kerry on this, so I assume they accepted his compromise proposals.)
A few things of note concerning safety issues:
(1) By including pickups and SUVs in one uniform standard, the proposal would tend to push more improvement in fuel economy from the largest vehicles. If vehicle size becomes more uniform, as the NAS study noted, this could have positive safety effects.
(2) The proposal also contained some provisions for safety standards that would tend to improve safety, such as tougher safety standards for rollovers and requirements in the design of pickups and SUVs that would make them less of a threat to passenger cars in collisions. This latter point is particularly important given that I find it quite repulsive, and quite a bad externality from the economic point-of-view, that one way to protect yourself safety-wise is to buy a gargantuan vehicle that endangers everyone else more…
(3) It is interesting to note that a study sponsered by Honda apparently concluded that vehicle weight reductions would not increase traffic fatalities and might even lower them. [I suppose if one is cynical, they could argue that Honda might have a reason for wanting to believe this, given that their fleet is more fuel efficient than most other automakers and thus CAFE standards might give them a competitive advantage. At any rate, Honda has long been one of the best of the automakers both from a “green” and safety perspective…incorporating side impact bars in the Civic, for example, and demonstrating that safety and fuel efficiency could go hand-in-hand. They are the company I would most like to reward with my next car purchase.]
All things considered, it seems to me that the arguments against this CAFE standards proposal on the basis of safety considerations is pretty weak, and also being used pretty disingenuously by lots of people who really oppose the standards for very different reasons.
What a crock. Previous attempts at regulation have given us the current SUV craze DUE TO DESIGNED-IN LOOPHOLES. Intentional or not, the failure to distinguish between work trucks and minivans-on-a-truck-chassis has resulted in this plague on our great nation.
Speaking of smaller and lighter cars… I drive a ('01) Volkswagen Golf. You’d probably describe it as small and light, but it’s one of the safest cars on the road. Why? It was engineered with safety in mind.
It also gets WELL OVER 40 MPG (in mixed driving). Over 50 MPG if you baby it on the freeway. It also has better accelleration and performance (not to mention fuel economy) than VW’s base model 4-cyl (2.0 liter) engine, and generates much lower greenhouse gas emissions as well.
Magic you say? Some kind of bizzare space-age fuel? Hybrid conversion? No… DIESEL.
The US government (and general populous) really needs to pull it’s head out of it’s arse, step out of the 1970’s and come to terms with the fact that modern diesel CARS (not to mention SUV/trucks) are the solution to our energy AND pollution woes.
There’s no reason that TODAY’S SUVs, combined with TODAY’S modern diesel engines, could not meet much higher CAFE standards while polluting LESS and performing just as well (if not better).
Why isn’t this being done in the US? Good question, but at least in part due to EPA emissions regs that are unfairly biased against diesel vehicles, poor quality fuel supply (resulting in dirtier emissions), and ignorance on the part of most everybody due to opinions formed during the bad old days of the 1970’s gas crunch when American automakers attempted to sell horrible gas-diesel conversion engines.
Europeans, as usual, are well ahead of us in this game. Diesel powered CARS in Europe have exceeded 40% and continue to climb quickly. In the US the figure is an order of magnitude less.
Now… it gets even better. I can run my car, with NO MODIFICATIONS, on non-petroleum fuel made from WASTE vegetable oil! That’s right, I can drive out to a local business and fill my tank with BIODIESEL made directly from old french fry oil! The car runs just fine, most pollutants are DECREASED as well (NOx emissions can increase between 5-10%, but carbon emissions decrease 40-50% IIRC), and the exhaust smells like french fries! (not exactly like fries, but definitely smells like the back of a McDonalds).
For the slow-witted reader, take note that biodiesel effectively has ZERO SUM carbon emissions, since all CO2 emitted from the tailpipe was captured from the atmosphere very recently rather than being stored underground for millions of years.
This is our key to breaking our debilitating petroleum addiction and stopping global warming to boot!
Now, how about a Ford Exhibition/Excretion/Exploder that gets better MPG AND emissions than an Escort? Think biodiesel-electric hybrid SUV.
I don’t know enough about diesel to tread into that debate. It is apparently a mixed bag…there are pluses and minuses. Here is an article that gives a bit of an introduction into that: http://www.auto.com/industry/diesel5_20020305.htm
Make up your mind, people. Do you want to tax gas to discourage its use in low-MPG vehicles, or do you want to tax gas in order to address hidden costs of pollution? The latter seems more correct, assuming that gas would have a flat tax put on it.
But my question is: where do the tax dollar’s go once we’ve collected them? Do they actually work to remove the pollution in some way, or are we just giving the government money hand over fist, and then when the time comes that we actually might need it the coffers are empty? (figurative: I know the government doesn’t have coffers)
Why wouldn’t we simply have a tax based on a car’s MPG? Isn’t that the issue we really want to address? It would seem, to me, to be a very possible thing to measure, much like vehicle emissions are measured in most (if not all, I don’t know) states across the US (here in MA it is every year, but when I lived in OH it was every other year). In faaaaact… if I go to get emissions tests every year, and they measure my emissions every year, and they could easily inspect my odometer every year… gasp wonder of wonders, could we not directly charge for pollution based on pollution?
To think!
Oh, and for the record, I don’t support outrageous taxes on gasoline for the same reason I wouldn’t accept outrageous tax on food. I don’t care if “they do it in Europe”. Let them. I’ll keep it in mind as a place to move to should I ever change my mind.
I am thoroughly confused by the agenda of the posters in this thread, because a flat tax on gas charged at the pump is not going to fix much of this, I don’t think.
Been there, done that. I’m not going to mail you copies of my transcripts to prove to you that I have not only taken economics (micro and macro), and sailed through all of my economics classes with A’s, but you should be aware that continuing to call me ignorant, uneducated, incapable of understanding, or stupid will not further this discussion. You disagree with my philosophy, fine. You don’t get to insult me directly because of it.
I still don’t agree with the socialist notion that the government should sit around fixing prices by implementing exorbitant taxes on things that enviornmental special interest groups dislike.
This whole thing reeks because several of you seem to have a problem with buyers and sellers meeting in the open market. Those are philosophical differences of opinion and don’t relate at all to my understanding of micro or macro economics.
Externalities exist. Unlike you, however, I don’t see the need to tax things until the price is so high that the majority of people who rely on those things to make a living can no longer afford them. But hey, that’s your philosophy. The solution to every problem is higher taxes and that anything else amounts to a government subsidy.
The opposite philosophy is that if the government keeps its hands off so that the people regulate their own economy, they’ll be better off, and that they will naturally absorb the ‘externalities’ when they pay for other services. Who assumes the cost of pollution in this philosophy? Well, if the pollution affects my health, I assume the cost. However, I do it directly instead of handing the government the money - so I know my money is going towards things that benefit me. If I pay $6 a gallon for gasoline because the government has instituted a 300% tax on it, is my health insurance company going to reduce my copay, my premium, and my prescription costs? Hardly. So at the end of the day, under YOUR system, I have even less money in my pocket for food, rent, bills and other things because just going to work becomes extremely expensive, and none of my other costs have gone down.
But please keep insisting that I’m stupid because I disagree with your economic philosophy. I understand the concepts of economics just fine.
Horse hockey. As you already pointed out, gas prices are pretty inelastic. The amount of actual driving will not be greatly affected by a tax increase - thus, if CAFE is not increased, the amount of gas consumed will not decrease significantly.
OK, so the situation is people want/need to drive X miles each year. Increasing the price of the gas will not have a large effect on the amount of miles driven, barring a tax increase that is politically impossible. So the alternative is to reduce the amount of gas needed to drive X miles each year.
Sua
All I know is, autos are offered in all kinds of sizes and weights, and Americans continue to snub their noses at “beer can” cars that get high MPG. Consumers have decided what kind of cars they want, and it aint no little light weight piece of crap that gets 40 miles to the gallon. Since there’s no oil shortage, I don’t see anything wrong with that.
I’m not meaning to insult you … All of us including me have lots of things we are ignorant about or don’t understand. Hell, as a research scientist, I spend most of my day at work being confused. But I really think that your comments amount to more than a difference in philosophy. A difference in philosophy would not lead you to say that externalities are not market failures and the various other things you say below. You might argue that the government does more harm than good when it tries to correct externalities. You might argue that the externalities are hard to quantify and tend to be overstated, etc., etc. You might even try to claim that there are countervailing positive externalities associated with automobile use. Those would be differences in philosophy (and to some extent facts that we could debate).
Or, you could critique market economics and explain why you believe that economists are wrong on this point. But, then you should be honest and saying that you are critiquing market economic theory and not that you are somehow arguing market economic theory as it is understood.
Once again, what I have a problem with is when these buyers and sellers agree to things that affect me and I’m not in on the bargain. The assumptions behind the economics of buyers and sellers meeting in the open market involve several things such as that all costs are absorbed by the parties in question, that the buyer and seller have full information, …
If we taxed gasoline significantly, that would create a windfall of revenue which could then be used to lower other taxes. My philosophy would lead me to support progressive tax cuts, especially since a gas tax would indeed be regressive by itself. I agree that a significant rise in the gas tax without any attempt to offset this for lower incomes would not be a good policy.
Yes, but the problem is that people impose costs on each other. Those people who buy huge SUVs impose costs on me and I don’t really want to subsidize their decision to drive these things.
Also, even if we don’t assume net transfers occur due to the externalities, they still cause too much gas (in this case) to be consumed relative to what would happen in a fully efficient economy where people paid the true cost. This is because, for example, I have little incentive to reduce my auto use because it has very little impact on the pollution that I breathe…most of that comes from the other people driving. (And, likewise, most of the pollution my car emits goes into other peoples’ lungs.
Barking Spider, if computers were subsidized to the point where I could get a nice new one for $500 instead of $2000, I would get a new one much more often or I would get a much spiffier one or whatever. Sure, when people are not paying the true costs of things, that will distort their buying habits. That’s the whole point.
I thought the “issue we really want to address” is excessive usage of gasoline. The most direct way to deal with this issue is to make gasoline more expensive to use, by taxing it. Isn’t that the more American way, to let market forces choose how to deal with the problem? If you tax a car by MPG it is unfair to people who cannot afford newer cars, and to people who choose to conserve gas by reducing car usage (moving closer to work, car-pooling, public transport, telecommuting, etc).
Has it occured to you that this is because they can afford to feed their SUVs? Will they still “snub their noses” at fuel-efficient cars when gasoline becomes more expensive to obtain?
I don’t think it makes me ‘ignorant’ of economics to say that market externalities are not, IMO, a failure of the free market. They’re part of the market and they get absorbed by it.
As for just reducing or eliminating income tax and taxing gasoline to make up for the externalities, well, that’s wonderful - except for all the things that were previously financed with income tax. I assume since one of the things you claimed is externally affected by gasoline usage is health care costs, that you’re going to use at least some portion of the tax increase to finance health care costs for people with problems attributed to emissions. Then you’re going to have to use the rest of it to finance the things that no longer get funding from income tax because they actually need to remain in place too.
Since you’re doing all of this in an attempt to ‘lower fuel consumption’, I’ll point out two problems with your idea. First, if you eliminated my income tax and then taxed gasoline to a level that it could finance the things you’re talking about, I could no longer afford to go to work. As I live in a very rural area because I cannot afford to live in a relatively safe area that has public transportation, taking the bus isn’t an option. There are no buses. However, since it now costs me so much to drive to work that I don’t break even on my paycheck when other necessities are added to it, I’ll quit my job. I can’t run a deficit forever, unlike the US government.
So, now you’ve reduced my demand for gasoline. If you reduce everyone’s demand for gasoline, and people buy far less gasoline, you will cause two problems: 1) As the demand for gasoline drops, so does your gasoline revenue. Without this revenue you can no longer finance health care and the things you have used the gas tax to fund in place of income tax. 2) As demand decreases, the oil companies are put into the position of having to cut prices to find more buyers so that they do not go out of business. There’s nothing they can do about the taxes - those are arbitrarily imposed by government and cannot be lowered - so they have to cut their own price per barrel, in turn allowing filling stations to cut their price per gallon. They can only cut the price so far before they’re running at an operating loss - and like me, they cannot run a deficit forever. More people are forced out of work as oil companies try to cut expenses so they don’t go bankrupt.
Which basically means that if your gas tax of x00% succeeds, and does indeed lower demand, you could very well be shooting yourself in the foot, since lowering demand means that you lower sales which lowers your revenue. Then you’ll have to raise taxes in other areas to make up for that loss - and you’ll continue to break the backs of working Americans who now find it too expensive to have a job.
Eh, not necessarily. Are we adressing excessive use of gasoline because of the pollution it brings or because of the fact that it is a limited resource? If it is the former, than at-the-pump tax isn’t the way to address it. A car which gets low mileage might still have excellent emissions, meaning that even though they use more gas, they aren’t really contributing that much pollution. In this case, we want to curb emmissions, and we want to then make the tax based on emissions. Since many states already monitor emissions, it is a simple matter of extrapolation from the actual number of miles travelled between inspections to find the total pollution contributed.
However, if we are simply tackling it as a limited resource, than I would wonder if gasoline consumption for private vehicles is really the large contributor of petroleum product usage. If it is, then i would agree that at-the-pump charges is the way to go. If it isn’t we are trying to get people to restrict their use of a product to achieve an end that cannot be achieved by discouraging its use.
As I hope I’ve shown: not necessarily. If we really want the taxation to work with the market, the tax should follow what we want the market to compensate for. I thought, personally, that the market flaw was in hidden costs (pollution), and so we should work out a way to tax pollution. The market, you see, already has means to deal with scarcity pricing. We don’t need to work a tax on that. Any tax we put would create an artifical scarcity.
Which is why I suggest we tax the actual (estimated) pollution instead. Is this not most accurate of all the proposed solutions?
In fact, what occurred to me is that those who can afford to feed their SUVs probably would still be able to even after a price hike. When we raise the price of what I feel could be called a necessary good we eliminate the people on the edge of the price fit already (people like me who scrounge change for gas for my 40MPG car) than those who don’t even consider gas prices in their budget (people who can afford $35K+ SUVs).
See what I mean?
catsix,
I don’t think I said anything about eliminating income tax…I don’t expect the gas tax would be nearly that high to completely eliminate the income tax. [Besides one can only be so progressive lowering the income tax since most lower income people pay more through payroll taxes than income taxes.] My rough estimate is that a $1.00 increase in gas taxes would net $100 billion or so (we apparently use ~140 billion gallons of gasoline per year in the U.S. now); personal federal income taxes account for about $1 trillion in revenues.
Yes, it is true that the gas tax will lower gas usage which will then lower receipts over what you would expect if you naively multiplied current consumption by the tax rate. But, that just means people are getting more efficient at using a resource that they have been using extremely inefficiently due to subsidies (real and effective). It’s not clear how much consumption would fall as demand is said to be fairly inelastic, although I think it is more elastic over the longer term…i.e., people might not drive that much less in the short term, but over the longer term they would then buy more efficient cars, factor commute distances more into their decisions about where to live, use more public transportation, etc.
By the way, any increase in the gas tax would have to be gradual (as phasing in the CAFE standards was set to be) in order to prevent shocks to the economy and to people and to allow for people to buy more efficient cars, allow for expansion of public transportation, bike paths, etc. How gradual I am not exactly sure…But, I was rather surprised at how easily we absorbed the large increase in gas prices a year or so ago, especially considering how the Republicans had made dire prediction about a gas tax hike of like 5 cents back near the beginning of Clinton’s presidency. (Of course, one could correlate the rise in gas prices with the start of the current economic slowdown but I have not heard most economists cite that as a major factor.)