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Bring Back The Free Market To Gas Prices

March 26, 2012
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Bring Back The Free Market To Gas Prices
Lawrence Solomon writes in the Financial Post:

There actually is a silver bullet, and it would lower gas costs … for the U.S. and the rest of the industrialized world. The silver bullet is a free market in gasoline, something that was abandoned almost a century ago, when the auto industry convinced governments to finance roads through a gasoline tax, and something that subsequent government interventions have further distorted. A return to a free market would not only dramatically raise the supply of gasoline, as the Republicans claim, but would also reduce the demand, as many Democrats desire. The combination of higher supply and lower demand would whiplash gasoline prices downward.

Step one in restoring a free market in gasoline is removing its punishing taxes — levies of about 40¢ per gallon in the U.S. over and above the sales taxes that normally apply and much more in Canada and Europe. The road-building rationale for these extraordinary taxes will soon be ending in any case, both because governments now realize that they won’t be able to raise enough money in future through gas taxes to meet motorists’ needs and because modern toll road technology allows for true user fees for roads, based on the specific costs of using specific roads. When consumers pay for their gasoline at the pump, they should be charged the market price for gasoline, no more no less.

Unbundling the cost of gasoline from road use would enable the law of supply and demand to function. Once each new road is financed on the basis of its ability to pay its own way, rather than from a pot of gas taxes that becomes dispensed politically, road building will become rational. Uneconomic roads won’t be built, resulting in less sprawl-related demand for gasoline. And because tolled roads tend to be free flowing — the price of driving increases as necessary to reduce congestion — less fuel is wasted in stop-and-start traffic. Tolled roads also reduce demand for gasoline by encouraging drivers to use their cars more sparingly — in tolled parts of London, for example, public transit use is up, walking is up, bicycling is up, taxi use is up, ride sharing is up and unnecessary trips are down as drivers, faced with more accurate pricing, reassess the costs and benefits of driving versus other modes of travel. As experience around the world shows, when consumers face unbundled price signals and better appreciate the cost of each mile travelled, they tend to drive less. Tolls discourage needless driving much better than gas taxes do.

A map of gasoline excise taxes per gallon in the USA.

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