Ecib 101 vs, Gasoline rebates, 6/21
or a gas tax holiday, which is the same thing
The Washington Post reported on Friday that Biden officials are taking a second look at whether the administration can send out rebate cards to help drivers pay for fuel at gas stations.
However, this is unlikely to happen in part because it would be difficult to administer and there would be no way to ensure the cards are only used for gas, the official said. Moreover, Congress would need to approve funding for such an emergency move and that would be challenging.
If I were an economic adviser to the President and he decided to enact a gas rebate, I would resign. Nobody who understands the laws of supply and demand should want to see this implemented.
The basic economic analysis is straightforward. The price of gas has to be high enough to balance supply and demand. A rebate amounts to a subsidy for demand. Raising demand will force the price to go higher. Because supply is relatively inelastic, it will turn out that, relative to the price that would have prevailed without the rebate, the price will be driven up by close to the amount of the rebate. The main beneficiaries of a subsidy for gasoline demand will be producers.
And a gas tax holiday will work the same way. It will reward producers. Any consumer benefit will tend to be illusory.
Time once again for the meme.
Anyone who can pass first-year economics should be able to explain what is wrong with subsidizing demand when scarcity is driving up prices. I grant that the rebate or a gas tax holiday could be politically popular, because many voters are ignorant. But no economist with any integrity could stick with any politician who supports it. What is the point of being an economic adviser if you cannot explain freshman econ to the politician you are advising?