Maximilian Auffhammer at the energy blog with no name:
... The national average price for gasoline is $1.80 this week, with a minimum of $1.29 in Tulsa, Oklahoma. The external costs for a gallon of gasoline, as estimated in a now classic paper, are approximately $2 per gallon. This means that the average American is currently purchasing gasoline at half of its true social cost.
Now, higher oil price won’t fix the external costs of course and we have argued ad nauseum for a carbon tax on this blog to fix one of the market failures. Michael Anderson and I have a nice paper suggesting that one would need to charge a gas tax somewhere significantly north of $2 to make drivers internalize all of the external costs you spew on your fellow citizens faces while hurling your Dodge Hellcat down I-80 at rush hour.
But low gas prices have all kinds of negative effects for a society that does not properly tax gas. People drive more and hence cause more congestion. People purchase less fuel efficient cars, since they think gas prices will always stay where they are any given day, which is rational. (What is not, is that folks buy more convertibles on sunny days.) So we drive our bigger cars more on a road network that is falling apart. Bridges and highways are in terrible condition, as has been documented widely.
The smartest energy economist I know and Energy Institute colleague, Severin Borenstein, has suggested a perceived outrageous solution to this problem a while back. A price floor for gasoline. Stop the presses! A neoclassical economist suggests a price floor. My version of the idea goes like this. If the price of oil drops below a certain price, say $70 per barrel, gas prices get frozen at the average local historical price for $70 oil. Yes, we would keep gas prices artificially high. This would discourage consumers from driving more and maintain disincentives to purchase really fuel inefficient cars.
But what to do with the profits? Give it to refiners? Oil companies. No. The idea is for the regulator to capture this windfall and use it to put our highway system back together. You are shaking your head. Well, the Chinese are not. In the first week of January, the National Development and Reform Commission (which is China’s economic planning agency) announced that price of Diesel and Gasoline would not be lowered as long as the price of oil is below $40. ...
Here is a post with some simple analysis on the Chinese proposal. I don't have any problem with this proposal other than it is a wolf in wolf's clothing. We would avoid a sales tax where consumers and retail producers bear the burden which would be shifted to the oil companies with a profit tax. Are the only winner's the gas stations (i.e., retail producers)? Or, since they make all of their money off beer sales (I'm looking at you Phil's Citgo) then they are hurt when people fill up less?
