I learned in econ 101 (and 501) that prices are determined by supply and demand. Maryland has just suspended its $0.36/gal gas tax for a month. But the price is set by market, regardless of what taxes the government adds. Won’t a lower price cause an increase in demand, which will cause the price to float back up to where it was when the tax was in effect? Or are consumers and suppliers affected by the psychological and political aspects of such a tax? That is, will consumers not increase their demand and be happy to pocket the savings? Will suppliers fear a backlash if prices rise, so they keep them artificially low (and by artificial, I mean keep them lower than the S/D curves would dictate)?
Summoning my microeconomics academic knowledge from 30 years ago and my 30 years of working in consumer packaged goods and retail finance.
Yes the net price will be lower but definitely not by 36 cents. The difference will go to entities up the production and distribution chain (from retailer to crude oil producer).
Also people will consume more gasoline and that will also benefit the same entities.
Look at an extreme example: Suppose that there were no tax, and the free-market price had settled in at $3 a gallon. Now suppose that the government imposed a tax of $4 per gallon. Would the price stabilize back to $3 (i.e., negative one dollar before tax)? Of course not. Whatever it stabilizes at after that tax, it absolutely must be some amount more than $4.
Now let’s leave that tax in place for a while, so it becomes the new normal, and then take the tax away. We know what equilibrium point we’ll reach, because it’s the same as the original problem statement: It’ll go back to $3. In other words, it’ll decrease from the over-$4 price.
Sounds good, but that’s likely not what will happen.
For an excellent example, look to the price of film in the late 70’s and early 80’s. The price of Silver rose rapidly, peaking when Hunt brothers tried to corner the market. This led Kodak and other film manufacturers to raise the price of film substantially. When the price of silver fell, the cost of film didn’t.
The federal tax is $0.184/gallon. States may add a tax and that varies.
So, the best the federal government can do is lower the price by $0.184/gallon. If the average price is $4.30/gallon it’ll get down to $4.12.
However:
There’s also some concern that the oil companies wouldn’t pass along all the savings to consumers if the federal gas tax was suspended. The current bill in Congress addresses this concern by stating that the “policy of Congress” is that “consumers immediately receive the benefit of the reduction in taxes” and that “transportation motor fuels producers and other dealers take such actions as necessary to reduce transportation motor fuels prices to reflect such reduction.” However, the policy has no teeth. There’s only a weak enforcement clause that permits the U.S. Treasury Department to “use all applicable authorities to ensure that the benefit of the reduction in taxes…is received by consumers.” There are no specific fines or other penalties for failing to abide by the law. SOURCE
It’s also called the economic theory of wheat and bread.
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Wheat goes up, bread goes up
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Wheat comes down, bread stays up
Yeah, it’s a safe bet that the reaction will be a bunch of companies saying, “SWEET! 36 cents more for US!!!”
Oil and gas companies are not noted for their philanthropy. Back in the 70s, during the Oil Crisis, the Rest of Canada tried asking Alberta politely if they could avoid screwing their fellow Canadians over by jacking up domestic prices along with the international trends, and they have not stopped screaming about that since.
What you are missing is gasoline has proven itself to be relatively inelastic in the short term. Which means demand is not so much affected by price, so yes the price should go lower. Now gasoline is not totally inelastic so there will be some increased demand, but it should be small.