Costly Regulation: The Case of Gasoline

by Don Boudreaux on September 16, 2006

in Energy, Regulation

My friend Andy Morriss, who teaches law at the University of Illinois School of Law, and his co-author Nathaniel Stewart, just published this important paper explaining how regulations unnecessarily raise the price of gasoline in the United States.  Here’s the paper’s abstract:

Gasoline markets today are dangerously
fragmented, the result of almost one hundred years of
often-contradictory economic and environmental regulations. In this
paper, we analyze that regulatory history, highlighting how the
unintended consequences of regulation have been to reverse market
pressures toward a broad, deep national market in a commodity, pushing
the United States toward a series of loosely connected regional
markets. As a result, the American economy is vulnerable to natural
disasters, terrorist attacks, and foreign dictators in ways that it
need not be. In addition, the weakening of market forces produces
higher prices for consumers and reduced innovation by refiners. We
conclude by suggesting steps that can be taken to reduce this
vulnerability and improve gasoline markets.

So here’s a question: how much should we reckon these regulation-induced higher prices to be Pigou taxes — or at least as serving some, if not all, of the purposes that Pigou taxes would serve in this market, such as reducing Americans’ use of gasoline?

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SteffenH September 16, 2006 at 5:21 pm

No, we shouldn't reckon these regulations to be Pigou Taxes. First, these higher prices amount at best accidentally to optimal pigou taxes. Second, Pigou Taxes are optimizing only under otherwise perfect markets.

Aaron Krowne September 17, 2006 at 11:35 am

I wonder how this compares to the shadow military subsidy which lowers the price of oil.

kebko September 17, 2006 at 5:43 pm

If the military is supposed to be lowering the price of oil, it seems like lately, they've been doing a very, very poor job of it. That strategy of causing a catastrophic disruption in a major producer nation seems like it backfired.

pigouvian September 18, 2006 at 5:14 am

Pigou taxes raise revenue. These regulations just cause deadweight.

JohnDewey September 19, 2006 at 11:12 am

Aaron Krowne: "I wonder how this compares to the shadow military subsidy which lowers the price of oil."

How does military spending lower the price of oil? Forgive my ignorance, but I truly don't understand the relationship.

rvman September 19, 2006 at 3:30 pm

Aaron is invoking the old idea that Iraq is all about the OIL and so, if we figured in the cost of operations in Iraq into the price of oil through a special tariff to recover costs from the 'obvious' beneficiaries of our military action, it would be $50 per barrel or some such number. So military spending is 'lowering' the price of oil by providing a security service the oil producers would have to provide, and assumes it would figure into the price they charge.

JohnDewey September 20, 2006 at 6:00 pm

rvman: "Aaron is invoking the old idea that Iraq is all about the OIL "

Gary Becker explained in 2003 why the Iraq War is not about oil:

"Iraq … must export its oil to gain the resources to buy goods, including weapons. Since oil is sold in a fluid world market, any nation, including the U.S., can get pretty much all the oil it wants by paying world prices. So the U.S. would be better off if it encouraged Iraq to export more, not less, oil because that would lower world oil prices. Yet America has not done this. Since the Persian Gulf War, it has led the international community in restricting Iraqi production as a means of presuuring Saddam Hussein to dismantle his weapons of mass destruction."

from Business Week, March 17, 2003

For the U.S., the Iraq War was always about terrorism and the fear that Saddam would feed the terrorists. The intelligence was faulty, no question about that.

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