Why all the hoopla over the gas tax holiday? Both Clinton and McCain have it wrong, I imagine they contacted their campaign advisors rather than their economic advisors before suggesting its repeal. The numbers simply do not work out on the side of the consumer. The way I see it reducing gas prices by $0.184 will reduce the national average
($3.611) for regular grade gasoline to $3.427. So currently a 15 gallon tank takes $54.165 to fill. If we remove the tax it costs $51.405, a savings of $2.76. This means that you get about 8/10's of a gallon more for the same money. It's a bit of a savings but nothing to write home about.
The way I understand it, when the cost of a good goes down, demand increases due to an individual being able to purchase more of it with the same amount of money. This means there is less supply of that good since more is being purchased. This is especially true since in this case because the raw materials (oil) used in the production of this good (gasoline) is a finite resource that is controlled by a cartel (OPEC). So as a result the price of gasoline goes back up since there is less of it.
Here comes the economics.
All this is due to the demand for gasoline in the US is inelastic. That is demand hasn't changed much with the increase in price this is because there is no realistic substitute for gasoline. There are options (E85, electric and etc) but they cannot yet be considered developed to the point of being a substitute for gasoline. Additionally gasoline is a normal good
, this generally means that with the decrease in price there is higher demand. What I am talking about here is price elasticity of demand
In economics and business studies, the price elasticity of demand (PED) is an elasticity that measures the nature and percentage of the relationship between changes in quantity demanded of a good and changes in its price.
Obama gets a gold star because in the end you have slightly lower prices in the short run and the same or higher prices in the long run. I imagine that a gas tax holiday would lower prices for a couple months (at most) and shortly there after we would be back to the same (if not higher) price we are today. The price will go back up because our demand of gasoline will likely not decrease from present levels, additionally when the price goes down we will likely see an increase in demand since the price is lower.
Also, we must not forget that we would be out millons/billons in tax revenue. At this point I don't think the government has the cash to lose. We need it for Iraq, the helping our neighbors with the global food crisis
and to help the people effected by disaster in Myanmar
. So there are plenty better ways to spend the gas tax than on our poor oil addiction.
Interestingly (but not surprisingly) the effects of higher gas prices are causing increasing demand on smaller cars, which is a prime example of cross price elasticity of demand
. Greg Mankiw
's blog has an example of this in a NYT article
and how camels are making a comeback
. He knows his stuff, is a Harvard prof and has a decent economics blog. He also wrote the text book for my macro class in college, it's one of the few text books I didn't sell after graduation.