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Julia Michaels Oral Presentation #1 Econ 539: Public Policy Analysis

Julia Michaels Oral Presentation #1 Econ 539: Public Policy Analysis. Distributional and Efficiency Impacts of Gasoline Taxes: An Econometrically Based Multi-Market Study.

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Julia Michaels Oral Presentation #1 Econ 539: Public Policy Analysis

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  1. Julia Michaels Oral Presentation #1 Econ 539: Public Policy Analysis Distributional and EfficiencyImpacts of Gasoline Taxes:An Econometrically BasedMulti-Market Study

  2. Bento, Antonio M., Lawrence H. Goulder, Emeric Henry, Mark R. Jacobsen & Roger H. von Haefen. 2005. “Distributional and Efficiency Impacts of Gasoline Taxes: An Econometrically Based Multi-Market Study.” American Economic Review, (95)2: 282-287. Accessed through J- Stor. *Cited using the style of the American Economic Review Article Citation

  3. Research Question Several proposed strategies to discourage gasoline consumption: • Heighten corporate average fuel economy (CAFE) standards, • Subsidize the retirement of older vehicles, OR • Increase the federal gasoline tax What would be the effects of a gasoline tax increase on efficiency and distribution?

  4. What Might We Expect? If we raise the gasoline tax.... • People might try to reduce their gasoline expenditures by driving less • Sales of fuel-inefficient cars might decrease • Sales of fuel-efficient cars might increase • Low-income households, or households with children, might suffer disproportionately vis-a-vis wealthier households

  5. Methods... • Authors use “an econometrically based multi-market simulation model” (p. 282) • Examines impacts of the policy on both the aggregate level and across households • Although the gasoline tax affects demand, it also affects vehicle choice; this estimation approach takes into account both effects. • Examined the estimated effects of a $0.10, $0.30, and $0.50 tax increase

  6. Conditional Utility Function Assuming that households are rational and choose to maximize utility, household automobile choices arise from decisions made on T-seperable choice occasions, where T depends on # of adults in household: Utj = Vj (y/T-rj, uj, qj, z, ) + ij y=household income rj, uj, and qj = automobile j's 1-yr rental price, operating cost per mile, and non-price characteristics (respectively) z = a vector for household characteristics = parameter vector that varies randomly ij = error term

  7. Additional Considerations Because there are so many different types of cars, the authors divided them into 5 age categories, 10 car classes, and 7 manufacturer (make) categories, for a total of 350 possible age-class-manufacturer combinations.

  8. Data Source 2001 National Household Travel Survey (NHTS) • “The most recent and comprehensive survey of US automobile demand” (p. 284) • Also contains a cross-section of vehicle miles traveled (VMT) and various economic, demographic, and geographic data

  9. Results... • The regressive nature of the gasoline tax is dependent on the manner in which the tax revenues are recycled (returned) to the economy. • Two types of revenue-recycling: • Tax-based = revenues recycled to households in proportion to gasoline tax payments • Income-based = revenues are recycled in proportion to their benchmark income

  10. Efficiency Effects • Gross efficiency costs are about $12, $38, and $68 respectively (for increases of 10, 30 and 50 cents) • However, this does not take into account environmental benefits or other important externalities resulting from the policy change • “The gas-tax increase induces a reduction in fleet size (increase in scrappage), a decline in quantity demanded of new cars relative to used cars, and a relative increase in quantity demanded of more fuel-efficient cars” (p. 286)

  11. Distribution Effects • Welfare Impact (EV) as a percentage of benchmark income • Under tax-based recycling, the gas-tax increase has a proportional effect; the EV for wealthy households is the same as for poorer households. However, costs are slightly higher for households that have children, as they tend to do more driving • Under income-based recycling, EV is regressive: costs are lower for high-income households and higher for low-income households

  12. Policy Implications • “Because of its potential to improve the environment and enhance national security, reducing automobile-related gasoline consumption has become a major US public policy issue” (p. 282) • This simulation helps us understand the effects of a potential solution (gas-tax increase) under two revenue recycling situations • The simulation shows that the policy would be fair under tax-based recycling, but regressive under income-based recycling.

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