Re: Re: Fuel Tax
Mycroft said:
Supply and demand would suggest that as the cost of gas goes up, the demand goes down. Government tax revenue would then also go down as fewer gallons are purchased.
True, but there wouldn't be the corresponding supply effect, so it's really not the same thing as when prices normally rise.
The demand curve is downward-sloping, meaning fewer people are going to buy the good at higher price levels. So yes, gas taxes make the price go up, causing people to consume less.
The supply curve, OTOH, is upward-sloping, meaning that suppliers want to sell a greater quantity at higher prices. Where these two curves meet, you have the equilibrium price.
Let's say the price of crude oil goes up. It is now more expensive to make each unit of gasoline, so the supply curve shifts to the left, meaning that they can supply fewer units at each price level. If demand remains equal, then the price rises and the overall quantity sold drops.
But in the case of a gas tax, this isn't really a function of the cost of gas. It's just an extra amount the government sticks on at the end. The consumer is going to treat this like any other price increase and reduce consumption, but the suppliers are still going to try to supply the same amount at each price level (before the taxes are added). This greatly affects elasticity and can actually cause the supply curve to have a steeper slope. Now, in effect, the supply curve will still shift to the left because the effective price level is still the after-tax price, but because the supply curve is now much steeper you'll get a greater drop in quantity sold for the same price increase.
