So many factors go into oil prices that the only real way to stabilize them would be for the government to set a price floor. In other words, when prices go below a certain point, flexible federal taxes kick in to bump them back to the mean, say $4 a gallon. I like this better than a straight gas tax, which doesn't take into effect the big fluctuations in market prices.Some conservatives even like the price floor idea. Charles Krauthammer of the Washington Post, for instance. He writes, “At $3 a gallon, Americans just grin and bear it, suck it up, and, while complaining profusely, keep driving like crazy.""At $4," he writes, "it is a world transformed. Americans become rational creatures. Mass transit ridership is at a 50-year high. Driving is down four percent…. Hybrids and compacts are flying off the lots. SUV sales are in free fall.” In effect, the great American love affair with gas guzzlers ends abruptly.Krauthammer’s solution: “Announce a schedule of gas tax hikes of 50 cents every six months for the next two years. And put a tax floor under $4 gasoline, so that as high gas prices transform the U.S. auto fleet, change driving habits and thus hugely reduce U.S. demand — and bring down world crude oil prices.”
Why is uncertainty in gas prices a policy concern? Prices go up, prices go down...around a longer term trend that is well, either going up or going down depending on whether you like real or nominal prices. But uncertainty in gas prices doesn't really concern me any more than, say, uncertainty in beer prices (wanted to get that in there somehow since it's Friday). On second thought, that's probably a bad example since there is state minimum pricing on beer and liquor, but that's because many states know that the demand for beer and liquor is inelastic and a minimum price will result in a steadier stream of tax revenue with no real reductions in consumpti...WAIT A MINUTE. If demand is inealstic, minimum prices on taxed goods set above the current equilibrium price result in small reductions in quantity demanded and large (and predictably stable) increases in tax revenues. Hmmmm...
So what's my solution for the externalities caused by gas consumption (which is really the only policy consideration any economist worth his degree cares about)? How about just a gas tax of about $1 a gallon?
OK, that's not my solution--hat's a lot of people's solution. But doesn't it make more sense to price the externality efficiently and then let those ever so rational consumer decide what they want to do?
Unless the real goal is stable revenue from taxes.
Then a price floor might work.
But that's not really the goal of a price floor on gas, is it?