Quote:
Originally Posted by Shazam
Of course they can gouge without collusion. All that needs to happen is one company raises prices and the rest follow suit. No collusion, yet higher prices.
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Sure. If they all just go along with it.
But why should they if one can be just a little bit cheaper than all the rest and steal a bunch of business from their competitors? (all other factors being equal).
If you see 4 gas stations on 4 corners, they usually all have the same price. If Station A goes 1 cent/litre lower than B, C & D then cars who would have gone to B/C/D now go to A. A doesn't make as much per litre, but sells many more liters. This would force the competing stations to match station A, or lose their customers.
Of course in real life it is much more complicated - people often don't act "rational" (they always go to station B because their daddy always went to station B, they have frequent buyer card, get airmiles from, will never go to station D ever since they got bad service, yadda, yadda) - but in the long run that is how markets react.
If this initiative truly is revenue neutral, then it will be shifting the tax burden from an income tax to a consumption tax, and generally speaking, consumption taxes are more "efficient". Additionally, you will be forcing carbon producers to include the cost of the carbon they are producing into their balance sheet; that is "internalizing an externality", and is generally seen as beneficial since it reduces the burden off the general public and makes the ones who benefit from the action accountable for the action.
So, in theory, the ideas are sound. In practice it all depends upon the very valid concerns already raised - how to account for imported goods, any relief for exports, cost of implementation and administration, and a thousand other real life issues that need to be evaluated, many of which may be problematic enough to sink the idea.
Edit: and Mel, if you recognize that as a textbook statement, then you will also recognize that gas stations on all 4 corners are not in perfect competition. Monopolistic competition or oligopoly may be better models. but you need to understand the textbook answers before you can make them more complicated.