RE: Oil Economics, a (long) thought experiment

From: Lee Corbin (lcorbin@tsoft.com)
Date: Tue Feb 04 2003 - 23:55:52 MST

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    Matt had written

    > Government spending is a (very big) issue that is separate from the
    > issue of how best to raise the money to run government. Would you be
    > better or worse off if your oil heating bill increased by $200 next
    > winter AND you also got an additional $200 in your tax rebate check?
    > That is the question I am asking.

    and Rafal replies

    > ### For me the answer would be easy - I'll take the tax rebate, and use it
    > to upgrade my furnace. Next year I would still get the tax rebate, but the
    > heating bill would be no longer 200$ higher.

    Doesn't this miss the point of the question? The idea is that you
    are financially no better off---the effects precisely cancel each
    other. Therefore, if it would be wise for you to invest in upgrading
    your furnace, it would also be if you had simply had to pay the same
    the other way.

    I consider Matt's question perplexing. I infer that Matt expects the
    government to get the $200 from the oil producers by placing a tariff
    on oil. I don't see how this directly relates to his earlier scheme:

    > i. Tax oil *at the barrel* (i.e. not at the pump)
    > ii. Prices of oil based products; fuel, plastics, etc. naturally rise.
    > iii. Alternatives to oil based products appear a
    > little cheaper. I.e. wood or metal instead
    > of plastic, bicycling instead of driving etc.
    > iv. Some consumption shifts away from oil to alternatives
    > v. Demand for oil decreases slightly
    > vi. To maintain revenues oil producers drop prices a little (*)

    That is, if everyone were to obtain such a rebate from the government,
    then no part of his scheme would actually be placed into operation;
    though everyone would pay more for oil, it would be exactly canceled
    by the rebate. So instead, where he must be going is that the $200
    is not *directly* related---rather it is some general dividend from
    the government that would *not* depend on how much oil you used.

    All right, so trying to follow what would transpire, his steps (ii)
    and (iii) kick in. People would start to use less oil, encouraging
    the processes of (iii) and (iv). But hold it! Once less oil is
    consumed, the revenue from the tariff falls, and so does the (in
    effect) $200 per capita rebate.

    I'm just guessing, but it still seems like people are getting their
    ends accomplished in a more expensive way. That is, oil is cheaper
    that the alternatives, and what the scheme does is to make it *appear*
    more expensive. No matter how you slice it, it seems that the society
    gets less mileage for its buck.

    To use the argumentum ad absurdum (or in this case, perhaps a better
    phrase would be "taking the argument to an extreme) to illustrate,
    the government could place such a high tariff on the oil that
    practically none of it was purchased. Then the whole society
    just has to make due with more costly substitutes, lowering the
    whole standard of living. This whole discussion may be nothing
    more than an illustration of TANSTAAFL.

    Lee



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