Gas prices seem to be a big issue in the USofA these days. Of course, gas prices in Europe and elsewhere have been far higher than in the US for decades — and they only get a litre! In spite of this, many pundits are speculating that the price we pay for gas will be a big political issue come November. The whole issue seems to me like a good example of how our political system breaks down and produces poor/inefficient results because of an irrational public. Indeed, gas prices should be much higher.

One of the reasons why increasing gas prices are viewed with such disdain, and rightfully so, is that they amount to a lowering of wages across the board, harming workers who already have the lowest incomes. Yesterday, a friend of mine, only half-jokingly, said that if Palestinians had to drive to their jobs it wouldn’t be worth working. I’m not denying the effect on people with the lowest incomes, but I think that it would be best to offset those losses elsewhere (for instance eliminating sales tax on food and necessities in states that have them) and raise taxes on gas to European-levels.

Americans’ use of gasoline has massive external costs, both to other Americans and to the rest of the world. All of the usual suspects are byproducts of our obsession: our tolerance of unsavory rulers in the Middle East and South America, the perverse incentive to wage costly resource wars, serious degradation of the environment, ridiculous traffic etc. These costs, to a large extent, are not factored in to the everyday price of gasoline. In fact, the costs to society from our reliance on oil and gas is exponentially greater than the out-of-pocket costs to consumers of those resources – driving is far too cheap. We, as a society, simply pay those costs elsewhere. So, like any good economist would say (I’m not including myself in that group), we should be focused on achieving efficiency in a market that isn’t functioning correctly – the price of gas should reflect the costs that are currently externalized, reducing demand to an efficient rate and providing accurate market signals to companies to develop alternatives. Instead, political pressure causes short-term “solutions” in the form of artificially increased supply to termporarily bring down prices.

Ironically (or maybe not at all), this is not clearly a Republican or Democrat issue, despite the dis-honest political bickering. Of course, Republican’s professed (but rarely actualized) disdain for taxes makes it hard to imagine them leading the charge on such an issue, but their overall praise for efficient markets (again unactualized) and decreased reliance on “foreign oil” (ditto) fits nicely with the proposal. Democrats have an easy sell to their Hummer-hating, BigOil-conspiracy-theory-developing constituency, and they don’t seem to shy away from taxation. Still, while it is counter-intuitive to most Americans, and largely above their head, it could be explained in a way that the average voter could understand. Unfortunately, political debate has become absurdly simplified wheras real-life solutions to real-life problems are rarely simple.

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