Consumer Response to $4 Gas Right Out of Econ 101

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Yesterday in “McHugh Favors $10 Gas Tax? Eek!” I asserted that if your goal is to quickly reduce the use of fossil fuels (whether or not that is rational), there is one and only one honest, transparent, effective and non-economically destructive way to do it: A revenue neutral carbon tax.

 

How do I know this? Because I’m an economist. No, I don’t have any letters after my name certifying this. I’m an economist (and since you’re reading this you probably are too) under the definition given by Milton Friedman in this interview: “I have found, over a long time, that some people are natural economists. They don’t take a course, but they understand–the principles seem obvious to them. Other people may have Ph.D.s in economics, but they’re not economists. They don’t think like an economist. Strange, but true.”

 

And what are those principles Milton was referring to? Ones based on the simple observation that human beings pursue their self interest (broadly defined), and in doing so respond to market incentives.

 

We know that the demand for motor fuel is highly price-inelastic, but is not infinitely so – when the price gets high enough people will actually use less. Evidence of the power of this particular economic incentive to change behavior and habits –  or to be precise this disincentive – was described today by Charles Krauthammer:

 

“The wholesale flight from gas guzzlers is stunning in its swiftness, but utterly predictable. Everything has a price point. Remember that ‘love affair’ with SUVs? Love, it seems, has its price too.

 

 “America’s sudden change in car-buying habits makes suitable mockery of that absurd debate Congress put on last December on fuel efficiency standards. At stake was precisely what miles-per-gallon average would every car company’s fleet have to meet by precisely what date.

 

“At $4 a gallon, the fleet composition is changing spontaneously and overnight, not over the 13 years mandated by Congress. (Even Stalin had the modesty to restrict himself to five-year plans.)”

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