Introducing a petrol tax

BS100 Economics Essay

Taxes have been around for hundreds of years in the civilised world and people have disputed taxes since they were introduced and are still disputed today. Many wars and times of civil unrest have been started over taxes. Governments are liked and disliked on their policies of taxation. In some cases they have been elected on their views and policies on taxes. Introducing taxes on petrol could discourage people to not use there vehicles so much and look for alternatives such as public transport or car pooling therefore lowering the number of road fatalities. Increasing taxes could also have a number of negative externalities including petrol being stolen, or people trying to source petrol through black markets. Introducing taxes could also mean low income families will not be able to afford petrol which could mean they could not make it to work, take their children to school or not be able to get to the shops to buy groceries or pay bills. With an increase in petrol prices it would mean and increase in goods prices due to transport costs.

Petrol is imported from all over the Middle East including Iran, Dubai and Abu Dhabi. Petrol prices are at around at $1.50 at the moment and this is due to the rise in oil prices. As at 24th April 2008 it was costing the petrol companies $124 to produce a barrel, if it continues to raise it could push petrol prices over $1.60 a litre for consumers. (News.com.au 2008).

All governments use tax mechanisms to raise revenue to provide public services. If a tax was placed on petrol it would reduce the amount of petrol sold but as a large percentage of society need petrol to go about doing their daily activities it would not reduce it by much. Petrol is a fairly inelastic good; this means that if it was taxed most consumers are likely to still purchase petrol. As petrol is an inelastic good it would mean that the dead weight loss would be relatively small.

An advantage of the government imposing a tax on petrol is that they would be able to use funds from the petrol tax to find alternatives to petrol. They could invest the money into other alternatives such as research into more fuel efficient cars and electronic cars for example the BMW B10. The increased tax set on buyers and suppliers of petrol would affect the market by shifting the demand curve left, thus losing some buyers and therefore requiring less of a supply. A new equilibrium would be determined with a lesser supply and demand. (Mankiw 2005)

Another advantage of introducing a tax on petrol would be an environmental benefit as well as an economic benefit. With petrol prices high as they are already an even greater increase in price would make people start to think more about where they drive, how they drive and who they drive with, thus helping the environment in the process. People would start to car pool where ever possible. An average car fits five people, if five people decided to drive to work one day a week then each person would only drive once a week that would save four days worth of fuel for each individual car and person or twenty (5x4) driving days per car for that group of people and save the environment from twenty days worth of air pollution. If a tax on petrol was introduced it could also encourage people to use public transport more were ever possible. A positive externality that comes from a petrol tax is that people would not want to drive anymore this could then lower the number of road accidents and fatalities.

There would be the same tax for both richer and poorer consumers in society. If people still want to drive and use petrol they will have to pay the additional petrol tax every time they fill up. There could also be a number of disadvantages if a tax was introduced for the purchase of petrol, including consumers resorting to stealing petrol and find other ways to get petrol such as black market activity. Consumers would not like the additional tax and some people may resort to such activity. It could also affect lower income earning families meaning they would not be able to buy petrol to get to work and earn the money to keep their family surviving.

With petrol prices already high a further increase could cause a number of negative externalities to occur. If people need petrol but prices are too high for them to afford it they may steal it, they could drive off without paying for it or siphon it from other peoples cars. Their may also be a black market were petrol is being stolen and then sold for a much cheaper price than at normal petrol service station. Transportation of goods will be more expensive due to an introduction of a tax on petrol. This will mean that goods will become more expensive.

In conclusion there are both advantages and disadvantage for introducing a petrol tax. Some advantages it could have on society include helping the environment by lowering pollution omitted into the air. It would increase revenue for the government through more people using public transport such as trains and buses. There would also be a decrease in the number of road accidents and fatalities as their would be a reduced number of cars on the roads. The disadvantages on introducing a petrol tax include people stealing petrol and resorting to buying it from the black market and much lower prices. A tax on petrol would hurt and affect the low income earning families the most. As every dollar counts the more they have to spend on petrol and the already expensive price, for them it would mean they miss out on work or can afford things such as rent or basic groceries.


References

News.com.au. 2008. Only Way is Up for Petrol. http://www.news.com.au/business/money/story/0,25479,23591598- 14327, 00.html (Accessed on 25th April 2008).

Gans, J, King, S, Mankiw, G, 2005, principles of Microeconomics, Thomson, Melbourne.


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