Sunday, October 01, 2006

Puncturing a Pet Peeve: Gas Taxes

Here’s a nice riff on a pet peeve. Anytime anybody tries to tax a transction, you get carpet-bombed with the response that the tax “will just be passed on to the consumer.”

Wrong. Depends on the shape of the curves. May go to consumers, in the form of higher costs, or to suppliers, in the form of lower returns. Today, Mark Thoma hoiks up a useful example (from Hal Varian—actually from Theodore Bergstrom) of how this works in practice, with a provocative result (link). The example: gas taxes. The result: a good deal of it will fall on producers.

Greg Mankiw gives it a showcase here. Robert Frank works out the graphs for a related example here.

None of this is news, or even new, but it looks (at least) like a neat classroom example. Don’t expect to see it on CNN anytime soon, though.

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