Question

Can anyone help me with this questions?

Why a direct tax on gasoline is a more efficient policy to reduce gasoline consumption than fuel efficiency standards?

Answer 1

• In order to reduce the gasoline consumption, the direct tax is considered to be more efficient than fuel efficiency standards.
• This is because fuel efficiency standards require the producer's to install more energy efficient equipments in their vehicles. This will impose higher costs for both consumer's and producer's.
• Producers will face higher costs of installation of these fuel efficiency equipments according to the standards while the consumer's will have to pay higher prices to compensate the rise in costs incurred by the producer's to consume gasoline.
• But a direct tax on gasoline consumption will encourage consumer's to buy more energy efficient vehicle's and consume less gasoline.
• This is because a direct tax will raise the prices of gasoline consumption due to which consumers are forced to reduce the consumption of gasoline.