Perfect Competition, Spatial Competition, and Tax Incidence in the Retail Gasoline Market
AbstractIn this paper we use monthly gasoline price data for all fifty U.S. states over the period 1984 to 1999 to examine the incidence of state gasoline excise taxes. Standard economic theory predicts full shifting of the excise tax to consumers when the supply of gasoline is perfectly elastic, and our empirical results are largely consistent with this prediction. In general, we find full shifting of gasoline taxes to the final consumer, with changes in gasoline taxes fully reflected in the tax-inclusive gasoline price almost instantly, a result consistent with a retail gasoline market in which firms are perfectly competitive and produce at constant cost. In addition, although we find that gasoline retail prices demonstrate asymmetric responses to changes in gasoline wholesale prices, we find only limited evidence of such behavior for retail prices with respect to gasoline excise taxes. Importantly, we also present a novel application of a spatial price discrimination model to examine tax incidence in markets that are not perfectly competitive. In this alternative framework, the incidence of excise taxes depends upon the competitiveness of retail gasoline markets, which depends in turn on spatial aspects of the market. Consistent with this alternative theoretical framework, our empirical estimates demonstrate that gasoline markets in urban states exhibit full shifting, but those in rural states demonstrate somewhat less than full shifting.
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Bibliographic InfoPaper provided by UW-Whitewater, Department of Economics in its series Working Papers with number 05-09.
Length: 32 pages
Date of creation: Oct 2005
Date of revision:
incidence; spatial competition; asymmetric response;
Find related papers by JEL classification:
- H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-12-20 (All new papers)
- NEP-BEC-2005-12-20 (Business Economics)
- NEP-COM-2005-12-20 (Industrial Competition)
- NEP-ENE-2005-12-20 (Energy Economics)
- NEP-GEO-2005-12-20 (Economic Geography)
- NEP-PBE-2005-12-20 (Public Economics)
- NEP-URE-2005-12-20 (Urban & Real Estate Economics)
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