05 Feb 2016

IER Analysis of Obama’s Proposed $10 per Barrel Tax on Oil

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2 Responses to “IER Analysis of Obama’s Proposed $10 per Barrel Tax on Oil”

  1. Dan says:

    You seem to imply that the oil companies can just pass on the costs of the tax to consumers by raising prices, since oil is “inelastic” according to you. Am I misunderstanding you? Because if not, I don’t see how this is correct (not that I dispute the main conclusion that ultimately, consumers will pay higher prices).

    Economic theory, especially Austrian theory, teach us that the incidence of taxation is always in reverse, i.e., costs of taxation aren’t just passed on to consumers.. that would essentially mean sellers can right now increase their prices without any affect on demand,. so why don’t they? Obviously they cannot. How can this be different for Oil.. if they could just pass the tax onto consumers by raising prices, then why haven’t they already done so for the just the sake of profit.

    • Bob Murphy says:

      Dan I actually think Rothbard’s argument on that topic is leaving out something important. Yes, it’s certainly true that oil companies can’t just decide to jack up prices $10 per barrel. But the reason they can’t in the original market is that competition would make somebody undercut the others. That check is weakened when there’s a new tax.

      The full explanation is still consistent with subjective value theory. The higher tax (a) makes marginal suppliers cut back output and then (b) the reduced quantity supplied means the marginal utility is higher and so consumers are willing to pay more.

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