Response on Gas Hike-BECKER

A few comments on some thoughtful posts. One of you commented on the most controversial part of my discussion: how the optimal tax to cover pollution and congestion costs is affected when gas prices go up for reasons other than taxes. Externalities are usually taught as being a constant amount per unit consumed, so the optimal tax to incorporate these externalities would be the same, as the comment argues, regardless of how much is consumed in the aggregate. But the assumption of a fixed externality per unit may not be right. An alternative approach assumes that the externality depends only on the level of market consumption. That is the approach I took without an adequate explanation. This assumption seems a better approximation for congestion costs, and perhaps even for local pollution costs. So while I did qualify my conclusion about the optimal tax per gallon possibly being lower with the increase in gas prices, I should have been clearer that this is only a possibility. There is some confusion in the comments between an excess profits tax and a tax, possibly even a progressive tax, on corporate profits. I believe so-called excess profits taxes involve a degree of social engineering that sets a terrible precedent. If a cyclical industry like oil sometimes experiences high prices and profits, and an extra tax is called for then, should the industry not get an extra subsidy when prices and profits are low? Should we do this also for other commodities, like copper and corn? There is more than enough incentive to subsidize the politically powerful-we do not need to add to these incentives. I do believe the evidence is powerful that NIMBY considerations affected not only the building of oil refineries but also of nuclear powered electricity plants, disposal arrangements for nuclear waste, wind power off of Cape Cod, and many other development during the past several decades. Is it any accidents that refineries are so concentrated in the Gulf, and hence refinery capacity is vulnerable to hurricanes, terrorism, and other risks? This is one region where politically it was possible to build refineries up to the 1970's.

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