New Yorker columnist James Surowiecki was interviewed this morning on NPR’s Morning Edition. (Here’s the link.) He argued for a hike in the national tax on gasoline.
He asserts that the price of gasoline in the United States is chronically too low. Its correct price (in his judgment) is higher than the market price, and a tax is a means of raising the price at the pump to a level closer to what it ‘should’ be.
One of his arguments for why the market price is too low is plausible (although I don’t believe it to be persuasive): this is the argument that drivers pollute the air and, so, by raising the price at the pump, drivers would be forced to internalize more of this external cost that they impose. (In a later post I’ll spell out reasons why I don’t accept this rationale as a good reason to raise gasoline taxes further.)
But Surowiecki’s other reasons reveal a surprisingly poor understanding of economics. The very first reason he offered to justify his endorsement of higher taxes at the pump is that “the American demand for gasoline outpaces our ability to supply it, because there aren’t enough refineries in America.”
Well, as we’ve witnessed during the past few weeks, when supply falls relative to demand, the price of gasoline rises. This effect is a classic instance of the forces of supply and demand working as they should. If Surowiecki were indeed correct that there’s some sort of permanent or chronic excess demand for gasoline in America, prices at the pump would rise and keep rising until this shortage were eliminated.
But even Surowiecki admits (I think correctly) that after the effects of Katrina and Rita are gotten over, the price at the pump will fall. Contrary to Surowiecki’s presumption, however, this price fall will reflect not some bizarre market failure of prices to adjust to the prevailing conditions of supply and demand, but, rather, it will reflect the fact that supply is not so chronically out of correspondence with demand as Surowiecki assumes it to be.
