Petrol Is Texed-Test

Case Study: Why is Petrol Taxed so Heavily? In European countries, petrol is among the most heavily taxed goods in the economy. In the United Kingdom, for instance, more than three-quarters of what motorists pay for petrol is tax; in Norway it is over 70 per cent, in the Netherlands over 60 per cent, and in Germany and Sweden around 65 per cent. Why is this tax so common? One possible answer is that tax on petrol is a Pigovian tax aimed at correcting three negative externalities associated with driving: • Congestion: If you have ever been stuck in bumper-to-bumper traffic, you have probably wished that there were fewer cars on the road. A petrol tax keeps congestion down by encouraging people to take public transport, participate in car pools and liver closer to work. Accidents: Whenever a person buys a large car or 4x4 vehicle like a Range Rover, s/he makes him/herself safer, but he puts his/her neighbours at risk. Statistical research has shown that a person driving a typical car is much more likely to die if hit by a 4x4 vehicle than if hit by another car. The petrol tax is an indirect way of making people pay when their large, petrolthirsty vehicles impose risk on others, which in turn makes them take account of this risk when choosing what vehicle to purchase. Pollution: The burning of fossil fuels such as petrol increases carbon emissions which, it is argued, are contributing to global warming. Experts disagree about how dangerous this threat is, but there is no doubt that the petrol tax reduces the risk by reducing the use of petrol.

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So the tax on petrol, rather than causing deadweight losses like most taxes, actually makes the economy work better. It means less traffic congestion, safer roads and a cleaner environment. (Mankiw & Taylor 2011, p. 212)

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