Strong opinions, weakly held

The externalities of gasoline

Ezra Klein’s Washington Post column today is about the externalities of gasoline:

Most of us would call the BP spill a tragedy. Ask an economist what it is, however, and you’ll hear a different word: “externality.” An externality is a cost that’s not paid by the person, or people, using the good that creates the cost. The BP spill is going to cost fishermen, it’s going to cost the gulf’s ecosystem, and it’s going to cost the region’s tourism industry. But that cost won’t be paid by the people who wanted that oil for their cars. It’ll fall on taxpayers, on Gulf Coast residents who need new jobs, on the poisoned wildlife on the seafloor.

That means the gasoline you’re buying at the pump is — stick with me here — too cheap. The price you pay is less than the product’s true cost. A lot less, actually. And it’s not just catastrophic spills and dramatic disruptions in the Middle East that add to the price. Gasoline has so many hidden costs that there’s a cottage industry devoted to tallying them up. At least the ones that can be tallied up.


  1. I have no problem with raising the gasoline tax. It’s all the other stupid taxes that will result from this disaster that will fail. Cap and Trade is an artificial market doomed to fail. Taxing US controlled off-shore production will just make us more foreign energy dependent. Subsidizing alternative fuels/tech makes the government a king maker instead of the market.


    Tax gasoline until the market finds a better way.

  2. They should simply require companies to put so many cents per gallon produced (or extracted) into an escrow fund for future cleanup costs. This extra cost would flow to the consumer as higher prices (just as any other extraction/production cost does), making future cleanup costs more directly connected to the end user.

  3. John, be wary of any type of production tax. That will move the US to produce less oil and import more. We will, in effect, export the external cost of oil production to other countries.

    The only way I see things getting better is by taxing consumption, which is production agnostic.

  4. By any measure, coal is even worse than gas. Yeah, gas seems pretty awful right now, but over the long term, coal is the bigger problem, and we use more of it because it’s used so much for power generation. We need some kind of tax on carbon emissions in general, not only for global warming reasons but also because extracting and burning fossil fuels sucks in so many other ways as well. Whether that takes the form of a carbon tax or cap and trade (just another form of carbon tax), I don’t really care.

  5. Coal is just a disaster all around.

    But, we need a coordinated global strategy that has a plan for China & India to continue to grow without using coal – which inevitably means less growth because coal is exceptionally cheap and easy to extract. Now, it may be that the US taking real steps on that path itself is a prerequisite for China & India to do anything about it, but it is not nearly sufficient in itself.

    Transport fuels are one thing – hard to substitute foreign carbon emissions for gasoline – but taxing other energy consumption is likely to just push production to countries whose power generation & industry is much dirtier and less efficient. Environmental regulation in general has this problem – the fierce commitment to tariff-free trade among economists, corporations, and the financial industry means that compensating tariffs to prevent regulatory arbitrage have never been introduced.

  6. Jeff, I hadn’t thought about it from that perspective. Couldn’t you level the playing field in that case by charging an import tax on imported fuels?

    The two things that concern me about using a consumption tax are:

    • The money getting diverted into the general fund (or highway fund) instead of being saved for the inevitable spill/disaster.
    • It disconnects the cost from the group most likely able to reduce the risk of the next spill – the producers. As a consumer, there are really no choices I can make to reduce the risk of a future spill. By having the producers bear the cost directly (which they can pass onto consumers of course), they have an incentive to reduce the risk of another spill (improving drilling technology or procedures). Of course, in order to get this to work, you would have to charge less to companies that reduce risk. My point is to put the incentives in the right place.
  7. @Jacob, that is a fair point and I was only thinking of gasoline and transportation as that is the biggest use of oil in the country and the easiest to replace (imo). Power Generation and coal are another ball of wax that is much more difficult to address for the reasons you’ve given. I’d rather go for the low hanging fruit first 🙂

    Speaking of imported goods and free trade, it does push manufacturing to countries with weak labor and environmental regulations. I guess that’s just another example of the US trying to push the external costs of doing business to another country. It’s one of the reasons I would like to see us ditch the income tax and replace it with a national sales tax (aka the Fair Tax). This allows you to recover some of those external costs on imported goods. Tariffs would be another way to do it (on either goods or raw resources) but it seems that we lack the political will do do use them.

    @John, increasing the gas tax would not be a way to encourage production safety improvements, it would be a way to decrease demand (and thus the need for production). Personally, I’d love to see the gas tax increased and every extra dime collected go toward reducing the deficit/debt.

  8. @Jeff, I support an increase in the gas tax to support transportation improvements and maintenance (roads, bridges, rail, etc), and to significantly increasing funding for research on any energy technology (old or new) that improves efficiency, pollution levels, etc.

    I don’t support using gas taxes for general fund debt reduction for the simple reason that I think it’s a shell game crutch we use to avoid our underlying fiscal problems.

  9. John, it is my firm belief that any clean energy effort led and directed by the government will result in a sub-optimal result. We don’t need increased government funding or research, what we need is for the government to recover the external costs via taxes and let the free market decide what technology can solve the problem in a cost efficient manner. I am not a fan of the government playing kingmaker by saying who wins money and who doesn’t. That road is paved with political favoritism, lobbyists and corruption.

    Re: Shell Games – Our entire budget is a shell game. They’ve been doing that with Social Security for almost 30 years and any other tax they’ve set up a “trust fund” for. Money is fungible and the crooks in DC will find a way to move it to where they want to use it.

  10. bring on the gas tax! tie it directly to this catastrophe, and explain it as preferable to raising everybody’s income taxes to pay for the clean-up, since not everybody uses gas to an equal extent.

    of course, it’s regressive to a nontrivial extent. but I also think it’s the right thing for our country (and species) in the long term, so act while public sentiment might actually be swayed…

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