King Rat (gkr) wrote,
King Rat

Eco 200: 4.3 cent gas tax

(group) Evaluate the following argument against a call for Congress to repeal the 1993 increase in the national gasoline tax:

Repealing the 4.3 cents-per-gallon tax will give oil companies an additional incentive to raise prices. If skyrocketing gas prices are due to supply and demand factors, as oil companies argue, a reduction of 4.3 cents will increase demand on a product already in short supply. The increased demand will contribute to increased pump prices.

What mistake has the author of the argument made?

Absent other changes, the initial 4.3 cent drop in prices will contribute to an increased amount demanded. But if the prices are then raised again (say, perhaps by 4.3 cents), the amount demanded will drop again. Amount demanded should fall back approximately to the levels that were being consumed the previous time the price was at that level.


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