Common Tragedies

Thoughts on Environmental Economics

Suboptimal policymaking paragraph of the day

Posted by Rich Sweeney on January 15, 2008

From the CBO Director’s Blog summary of a recent study on consumer responses to gasoline price increases. Not too much new here, but this paragraph caught my eye. Yet another example of how politicians’ categorical opposition to all taxes leads to poor policymaking and mixed incentives:

The study notes that the response of consumers to higher gasoline prices has important implications for policies that affect gasoline consumption, including CAFE (Corporate Average Fuel Economy) standards for cars and light trucks. Because higher gasoline prices increase the demand for vehicles with better fuel economy ratings, they reduce the economic costs (and fuel savings) of adopting more-stringent CAFE standards. At the same time, to the extent stricter CAFE standards improve fuel efficiency beyond what consumers would choose in the absence of such standards, they reduce the per-mile costs of driving — which would partially reverse some of the effects of higher gasoline prices discussed in this study. The federal tax on gasoline, by contrast, reinforces rather than neutralizes the behavioral and vehicle choice effects of higher gasoline prices. It also immediately affects all motorists’ incentives to reduce gasoline consumption, whereas CAFE standards primarily affect motorists only after they replace the vehicles they were driving at the time the standards were implemented.

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2 Responses to “Suboptimal policymaking paragraph of the day”

  1. Evan Herrnstadt said

    Complementarity is so crucial, yet so rarely discussed. Another example that I know we’ve cited a lot here is a carbon price and R&D spending. These types of policies are not substitutes, they are complements that help reduce the cost associated with one another.

    It would be nice to be able to pass a real omnibus energy bill that includes all of these measures designed to fit with one another, but I have to assume that if such a bill hit the Senate, James Inhofe would get out the old telephone book and treat the rest of the Senate to several hours of filibuster storytime.

  2. k said

    I just wanted to share the thoughts of a professor of mine, Prof. Rick Geddes, who was one of the dissenting opinions on the National Surface Transportation Policy Commission that recently recommended increase the federal gas tax by a dollar per gallon over the next decade: (paraphrasing) the problem with federal gasoline taxes is that the money just goes right back to states as highway funding after siphoning off large parts of it for arbitrary earmarks. It also give the federal government the power to control certain state laws by threatening to eliminate federal highway funding. So in terms of efficiency and federalism it would be better for gasoline taxes to be imposed at the state level rather than at the federal level.
    see http://www.news.cornell.edu/stories/Jan08/transport.testimony.sl.html

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