Monday, December 3, 2012

Petroleum Taxes and Subsidies

Here is a New York Times article from last year on gas prices and government policy.  I am not going to focus on the politics in the article, but rather the economics.  As most people know the US government charges federal tax on gasoline, and states charge an additional tax per gallon.  Think of this as a per unit tax - as I use in Prin. of Microeconomics.

Now in reading through the NY Times article, notice that the US government provides several tax incentives or tax breaks (i.e. subsidies) to oil producers.  So here is what I want you to think about, why are firms receiving subsidies and consumers charged a tax on petroleum?  Another way of thinking about this is the US government is re-distributing income from gasoline consumers to oil producers.  OK, let's call it welfare for oil companies, and not economic welfare.

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