Wasting Energy in New Mexico I

I am all for reducing the state’s tax burden. That should be our highest priority. But the latest proposal to help consumers of gasoline will do very little. In fact, it is likely to be counterproductive in the long run. Here is what I know about the proposal according to the Albuquerque Journal (subscription):
“The next regular session of the Legislature won’t come until January. Richardson said he wants state lawmakers to consider even sooner the possibility of giving taxpayers a one-time tax rebate and whether to temporarily suspend the state’s 17-cents-per-gallon gasoline tax.”

Here is roughly the current situation pictured in supply and demand terms
:
gasoline tax suspension.jpg
The lines S and D represent supply and demand. The price P of gasoline is on the vertical axis, quantity Q is on the horizontal axis. The supply curve S is shifted upward to S+T because of the tax T (17¢ per gallon). Firms sell quantity Qo at price Po (currently about $2.71 per gallon). Firms actually receive Po-T per gallon of gas sold (currently about $2.54 per gallon less any other taxes). The revenue collected by the state can be represented by the area of the rectangle enclosed in red. Notice that the quantity supplied (the S line schedule) is much less responsive to a change in price than is the quantity demanded (the D line schedule). Economists agree that this is roughly the situation.
Here will be roughly the situation after the tax is suspended temporarily:
gasoline tax suspension1.jpg
The price will fall slightly to P1 (about $2.69 per gallon) and the quantity sold will increase slightly to Q1. The yellow area represents the trifling gain to gasoline consumers; it is much less than the gain enjoyed by firms (the green area).
Why will the temporary tax suspension likely be harmful to consumers beyond the suspension? It sends the wrong signal to firms in the gasoline business. They know the tax reduction is temporary, so it will not affect their decision making. More uncertainty is introduced, however: Thanks to government intrusion and activism firms do not have a stable policy environment in which to make decisions. They are less likely to take action to supply more gasoline. Less supply will mean higher prices for consumers.
By the way, the harmful effects of rising gasoline prices have been blown way out of proportion by the main stream media and their political brethren.

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