Whenever economic conditions change, there are obvious primary effects and less obvious secondary effects. Rising oil prices have the primary effect of causing people to spend more on gas. Secondary effects include reduced oil use, reduced demand for gas-guzzlers, higher food prices, and increased research into alternative energies.
Asako Ohinata at the University of Warwick did a study of the effect of a working families tax credit on fertility in the UK. The question was whether people would actually have more children if given a modest economic incentive.
The results were mixed. The tax credit did not affect when couples had their first child. But, among couples who had one child, they had a second child sooner as a result of the tax credit.
This speaks to the amazing power of economic incentives. If you want to reduce dependence on foreign oil, then increase gasoline taxes. If you want to reduce garbage output, then tax items at the time of purchase based on the amount of garbage they will ultimately produce. There may be political barriers to such actions, but there is little question that they will work.
Hi Michael,
ReplyDeleteI understand the point of your post (that economic incentives mostly work), but as far as foreign oil goes, I'm not sure the gas tax comment applies. To me, there's two related problems:
1- dependence on foreign oil
2- "excessive" use of gas (which causes problem 1)
To me, reducing dependence on FOREIGN oil requires a combination of making "local" oil cheaper and making "foreign" oil expensive. Maybe look at taxing oil transportation?
My opinion is that consumer-level gas taxes may address problem 2, but with an increased risk of lower economic activity (people more pessimistic because of high prices) and/or spiraling inflation (as gas tax costs are added to prices).
Thanks for your blog! I'm an avid reader.
Cheers,
Fernando
Fernando: You make an interesting point. The strategy you describe will work as long as domestic sources of oil are available (even if they are somewhat more expensive to get at). Maintaining lower prices on domestic oil will keep demand for oil high and eventually will put pressure on these domestic sources. This will work for a while, but not forever. As long as your strategy is coupled with substantial subsidies for all other plausible alternative sources of energy, we may have alternative solutions before the domestic oil runs out. But if at some point we become unable to satisfy demand domestically, we'll be in for a very rude shock on oil prices making the past year or two seem mild by comparison.
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