In-Class Activity

Internalizing Externalities: A Gas Tax Discussion





Sustainable Communities Winter 2020








Externalities are positive or negative impacts that occur as a by-product of production and exchange; they flow to people other than the buyer or seller

they are external to the buyer and seller


The resulting social benefit (or cost) differs from the private benefit (cost) on which the traditional supply curve is based.


Examples of positive and negative externalities?





Cost of Gasoline



How much does gasoline cost in the United States right now?



How much does gasoline cost elsewhere?



Why the large differences in price?




Externalities and Pigovian Taxes

What are some externalities associated with gasoline and vehicle use? Are they positive or negative?


What are some of the problems/difficulties associated with implementing a Pigovian tax? Can you think of some common criticisms?


Do you think that a Pigovian gas tax is a good option for internalizing externalities associated with transportation? Why or why not?


Choose a gas tax rate that you feel is appropriate (in dollars per gallon) and justify that value.





Taxes – for government revenue and/or to reflect negative externalities resulting from fuel use.






“The federal 18.4 cent-per-gallon gas tax is the main source for the Federal Highway Trust Fund, but it hasn’t been raised in two decades, starving U.S. infrastructure. Also, the gas tax is set too low to offset the negative side effects for society — economists call them “externalities” — associated with gasoline consumption. Those costs include traffic, air pollution, wear and tear on roads, [and] climate change.”

A 15 cent-per-gallon hike was one of the recommendations of the Simpson-Bowles debt reduction plan in 2010. This would roughly cover the current shortfall in the transportation budget.

A 12 cent-per-gallon hike was proposed in the summer of 2014







Practical Considerations

Highway Trust Fund, which depends on these federal gas tax revenues, has seen its revenues fail to match its level of spending for over 15 years

As a nation, we currently spend about $50 billion on transportation projects (economic externality) but the gas tax only brings in $34 billion.



August 2, 2015- Congress Should Look Beyond the Gas Tax



Feb 2, 2016- Congressional Budget Office: Tolls, mileage fees would better fund roads


Nov 5, 2015- House Passes $300 Billion Bill to Improve Roads and Bridges


May 1, 2017- Trump to ‘consider’ raising the gas tax


Dec 2019- Congress passes transportation funding bill


Federal and state gas taxes



Why is there so much variability in state gas prices?



State Gas Price Averages



State Level Responses

Pay per mile for using the roads? Oregon can teach Washington a few things.


Oregon EV Owners Will Soon See Higher Registration Fees


Oregon’s Unique Bike Tax Is Pulling In Far Less Than Expected


In-class activity: Let’s consider the problem at a national level


What solutions do you like best for bridging the gap between infrastructure costs and the federal highway transportation fund?

Considerations include increased costs due to climate change, deferred maintenance costs, vehicles becoming more efficient

How should we address other economic, environmental and social externalities?

Use a systems-thinking approach. Are major reforms needed?

How much are you willing to pay?

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