This change in work is tiny compared to the total number of hours worked, but still substantially increases the optimal gas tax, because the labor market is far larger than the gasoline market. Ignoring effects on work decisions, the optimal gas tax is equal to marginal damage, which other researchers have estimated at 88 cents per gallon (in 2003 dollars). Using this estimate, West and Williams find that the optimal gas tax is $1.19 per gallon (also in 2003 dollars), with the difference arising because higher gas prices encourage work.
Gasoline taxes are a hotly debated topic in both environmental and economic policy settings. Previous studies have examined the effects of various gasoline taxes on the supply and demand for gasoline. But in Empirical Estimates for Environmental Policy Making in a Second-Best Setting (NBER Working Paper No. ), authors Sarah West and Roberton Williams examine the effect of gasoline taxes on work decisions. Do people work more or less when gasoline prices go up? The authors find that higher gasoline taxes encourage work, and when this effect is taken into account, the optimal gasoline tax is substantially higher than previous research has suggested.
A look at the effects of gas prices on the economy
There are many negative effects of rising gas cutting back in vacation time, prices of everything is going up “inflation”, car companies making more efficient cars.