Environmental Economics

The Senate yesterday launched a high-profile debate on a Democratic plan to block
the nation’s five biggest oil companies from taking advantage of a suite of tax breaks.

Against the backdrop of rising gasoline prices, the chamber voted 92-4 to cut off any potential
filibuster of the proposal, setting the stage for an election-year discussion about the issue.

The bill, sponsored by Sen. Robert Menendez, D-N.J., is unlikely to be passed by the House and
Senate, but the measure could fuel Democrats’ arguments that Republicans are unabashedly protecting
“Big Oil” profits while motorists pay more at the pump.

“People are tired of paying ridiculously high gas prices and then paying Big Oil a second time
with subsidies,” Menendez said.

Menendez’s measure would repeal five tax incentives for the nation’s five biggest oil companies
as a way to pay for renewable-energy tax credits used by wind and solar producers.

via www.dispatch.com

I'm sure there are many arguments against the business practices of Big Oil that might lead to slightly (and I mean very slightly) lower gas prices, but removing subsidies is not one of them. You see, basic supply and demand analysis would show that subsidizing production of something increases the supply of the good causing an increase in the equilibrium quantity and a DECREASE in the equilibrium price. Removing subsidies will decrease the supply causing a decrease in the equilibrium quantity and an INCREASE in the price. In other words, removing tax breaks for Big Oil will increase, not decrease, gas prices.

Now, I don't think removing the subsidies is necessarily a bad thing. Subsidizing production of a good that creates negative externalities is counter-productive and the opposite of economically efficient. But the uncomfortable reality is that in the case of negative externalities, the economically efficient outcome is HIGHER prices.