Liberty is for me…

Richard makes an excellent point in his comments to Liberty Girl’s post on the cigarette tax. He uses price elasticity to suggest I’m wrong to advocate on behalf of the carbon tax, as I do in the comments section.

Funny enough, The Teaching Company promotes their course on economics with this passage:

If you complete this course and devote some thought to its subject matter, you’ll be able to hold your own any time the discussion turns to economics, whether it’s at your office, in the news, or at the dinner table.

If you hear someone say, for example, “A tax on gas could be a good way of encouraging people to drive less,” you’ll be able to add, knowingly, “Perhaps, but of course, it all depends on the elasticity of demand for gasoline.”

Today in the New York Times there’s a piece on this very issue by Bryan Caplan, GMU economics professor and author of the wonderful book, The Myth of the Rational Voter.

Caplan is in Richard’s camp, advocating for the gas tax holiday. He freely admits, however, that the vast majority of economists agree with me:

Why are economists so opposed? In the short run, the supply of gasoline is basically fixed; it takes a while to build a new refinery. The demand for gasoline, in contrast, is more responsive to price; we’re already seeing greater use of public transportation and brisk sales of fuel-efficient cars. When you combine fixed supply with flexible demand, it’s suppliers, not demanders, who pocket the tax cut. That’s Econ 101.

While the supply of gas is inelastic in the short run, demand is more elastic. Further, in the long run, supply and demand for just about everything tends to be elastic.

What would happen if the cost of a gallon of gas jumped to, say, fifty bucks? People would respond! Consumers would use less. More importantly, entrepreneurs would have a huge incentive to produce other types of energies.

Ethanol and nuclear don’t have the negative externalities associated with gas (pollution and war), though they do have some serious flaws (starving poor people and nuclear waste).

But what about new, unforeseen technologies? Who knows what the entrepreneurs will discover. They may even find a super energy in something as unsuspecting as slime!

Here’s an open letter from over 300 economists — including numerous Nobel prize winners — opposing the gas tax holiday because it transfers money from the highway trust fund to oil companies while not doing a damn thing for struggling American families. Plus, it encourages people to burn oil instead of conserve it while adding billions to the federal deficit.

So why does Caplan support it? Two reasons unrelated to elasticity: First, it may decrease the likelihood of even worse policies, like price controls. Second, he thinks it will incentivize producers to increase production.

He concludes:

Politicians are constrained by public opinion. When the public rejects the mundane explanations for high gas prices — big boring facts like rapid Asian growth — politicians aren’t going to correct them. The best we can expect is for Washington to try to channel the public’s misconceptions in relatively harmless directions. We could do a lot worse than the gas tax holiday; in fact, we usually do.

(For an interesting analysis of price elasticity, see Megan McArdle. Or, better yet, Stephen Colbert.)