Externalities of Transportation

We all know that pollution creates negative externalities and that there are a variety of methods to help deal with the problem. According to an article on libray.thikquest.org one simple method is that the government introduces a fuel tax, which they have already done. The effectiveness of this process depends largely on the elasticity of the demand for fuel. In the short run, fuel is quite inelastic, meaning that raising the price will not greatly decrease fuel usage. But in the long run, an excise tax will decrease fuel usage. This solution might encourage people to buy cars that use less fuel or to use public transportation. Both of these changes are environmentally desirable. So even though the excise tax isn’t going up, but prices are, why do people keep buying gasoline? Do you think in the long run people will quit buying gasoline because of the high price and why is it they quit buying it because of the high price but not because of the negative externalities it causes to the environment?

1 comment:

Dr. Tufte said...

This is a classic way of internalizing the (external) costs of pollution.

The weakness of this approach is that it isn't clear to what extent the demand for gas that is inelastic in the short-run will become more elastic as time passes. We know the generalization that demand for goods becomes more elastic through time, but we don't know the specifics of how fast any particular good will become more elastic.

The result of this is that it is very hard to gauge how much gasoline demand will be deterred by imposing a tax.