Lawmakers in both Maryland and Georgia have officially suspended the state gas tax in an effort to help drivers over the coming weeks. Politicians have chosen a politically popular policy rather than addressing a more serious underlying issue.
Another component of this that works against the goal of lowering prices is that if the tax is removed that acts as a demand shifter. If demand increases then the market price will rise and poof! there goes the savings, or at least some of the savings. Oh, and then there's the hole in the infrastructure budgets of states this will create. Those gas taxes are used to fill the potholes, and politically, there isn't much that angers the citizenry like crappy roads. Maybe states are thinking they can grab more of the federal infrastructure spending, but in the meantime, they'll have to cut some projects. Georgia may not have to worry as much as Maryland, but western Maryland gets plenty of awful weather.
Wouldn't we move along the demand curve? Since the tax is levied on the station, not the consumer, quantity demand increases, but only in response to the disappearance of the S+tax curve.
Can you comment more on the tax incidence? What this shows is the gas stations passed on 86% of the savings to customers. If we are assuming gasoline is inelastic, wouldn't we expect a much lower % to be passed on? I wonder why this happened. Competition? Pressure? Marketing? Maybe it's not as inelastic as we think?
Both subsidies and taxes fall heaviest on the more inelastic of the two. Even if a buyer has fairly inelastic demand, they'll receive the bulk of the subsidy but not all of it. You can think about it from the quantity response as well. Reducing the gas tax will lower the price and increase the quantity demanded of gasoline. The only way for station owners to increase the quantity they sell is by receiving a price increase.
If station owners are more elastic (more responsive) then small increases in the price will have a big increase in the amount their willing to sell. The idea is that they don't need as much money to increase the amount that they sell to match the increase in quantity demanded.
I thought the same thing James. I bet it is competition. Too many stations have room to fiddle with the price and can attract more customers. People are going out of their way to save 10 cents on gas (although they didn't when prices were $3.09 even though it saves them the same amount) so if the station across the street lowers price by 10 cents, I'll lower it by 12 cents. It isn't cutting into my pre-tax cut profit so I'm willing to pass that on to customers to get a few more buying gas. Let the price wars begin!
I think this is the intuitive sense behind it since the tax incidence lesson is typically framed as a competitive market story. Since each gas station is nearly a perfect substitute for the one next down, an individual station owner doesn't have the incentive to keep "too much" of the tax for themselves when they can lower the price and attract more customers.
Gasbuddy does have data for two metro areas: Baltimore and Hagerstown. Baltimore did show a bigger drop in prices (32 cents) compared to Hagerstown (about 26 cents). Hagerstown has 40,000 residents so there's likely much less competition for gas station owners, so they have less of an incentive to give back the full amount.
Another component of this that works against the goal of lowering prices is that if the tax is removed that acts as a demand shifter. If demand increases then the market price will rise and poof! there goes the savings, or at least some of the savings. Oh, and then there's the hole in the infrastructure budgets of states this will create. Those gas taxes are used to fill the potholes, and politically, there isn't much that angers the citizenry like crappy roads. Maybe states are thinking they can grab more of the federal infrastructure spending, but in the meantime, they'll have to cut some projects. Georgia may not have to worry as much as Maryland, but western Maryland gets plenty of awful weather.
Wouldn't we move along the demand curve? Since the tax is levied on the station, not the consumer, quantity demand increases, but only in response to the disappearance of the S+tax curve.
Can you comment more on the tax incidence? What this shows is the gas stations passed on 86% of the savings to customers. If we are assuming gasoline is inelastic, wouldn't we expect a much lower % to be passed on? I wonder why this happened. Competition? Pressure? Marketing? Maybe it's not as inelastic as we think?
Thanks again for writing.
Both subsidies and taxes fall heaviest on the more inelastic of the two. Even if a buyer has fairly inelastic demand, they'll receive the bulk of the subsidy but not all of it. You can think about it from the quantity response as well. Reducing the gas tax will lower the price and increase the quantity demanded of gasoline. The only way for station owners to increase the quantity they sell is by receiving a price increase.
If station owners are more elastic (more responsive) then small increases in the price will have a big increase in the amount their willing to sell. The idea is that they don't need as much money to increase the amount that they sell to match the increase in quantity demanded.
I thought the same thing James. I bet it is competition. Too many stations have room to fiddle with the price and can attract more customers. People are going out of their way to save 10 cents on gas (although they didn't when prices were $3.09 even though it saves them the same amount) so if the station across the street lowers price by 10 cents, I'll lower it by 12 cents. It isn't cutting into my pre-tax cut profit so I'm willing to pass that on to customers to get a few more buying gas. Let the price wars begin!
I think this is the intuitive sense behind it since the tax incidence lesson is typically framed as a competitive market story. Since each gas station is nearly a perfect substitute for the one next down, an individual station owner doesn't have the incentive to keep "too much" of the tax for themselves when they can lower the price and attract more customers.
Gasbuddy does have data for two metro areas: Baltimore and Hagerstown. Baltimore did show a bigger drop in prices (32 cents) compared to Hagerstown (about 26 cents). Hagerstown has 40,000 residents so there's likely much less competition for gas station owners, so they have less of an incentive to give back the full amount.