Mankiw's Manifesto (II)

My response to Mankiws latest gas tax manifesto:

CAFE still isn't perfect, but as the reports on my blog discuss, the revisions to the program help rectify most of the SUV substitution issues. There are many issues that I don't like about the gas tax idea, but one thing I like about CAFE when compared to it is that increasing CAFE stanadards every few years FORCES gradual technological improvement and gas use reduction over time.

A gas tax, as an incentive only, does not force anything. There has been some evidence that car companies are increasingly collaborating and using oligopoly status to create lasting partnerships - both domestically and across borders. And given that for the vast majority of the US geography, consumer substitutes to vehicular transportation and commuting is low, vehicle producers have a good degree of market power and do not have to change its vehicle makeup much at all in response to a gas tax and changes in demand. Partially because, the cost of getting over the instituional hurdles and adopting cleaner technology far exceeds any marginal profit loss of keeping the same technology and makeup. So much of any potential profit loss can be mitigated by passing the buck to consumers, who largely have little choice in the matter. Marginal changes in supply makeup and fuel efficiency will surely occur due to demand changes for gasoline and fuel efficient transporation - but these are likely to be slight (given a politically feasible gas hike dollar value) and likely to effect different sets of the population drastically differently (see other comments). Some of the benefit of those small effects, again, are mitigated by the oligopoly power of the OIL industry.

Beyond that, sometimes, real change doesn't happen unless someone is there to push and prod. It's like a 30 year old who won't leave their parents' house. You can offer to help pay a portion of their rent of an apartment, ...or you can just say, "Hey, you are 30 years old, get out my next month or else I will kick you out." ...The son might not have ever been aware of what existed out in the world if the parents had not forced his eyes open.