If fuel duty were abolished today, what would be the consequences? Watch

Erik.
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#1
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without fuel duty a litre of fuel could in theory retail for as little as 50p (less?) so surely the cost of food would plummet, all goods in fact.

But what would be the other effects on the economy and society - for example how much would we have to tax other areas to recover this revenue - are we talking about a MASSIVE defecit we would suddenly have?

If we were to raise income taxes to compensate, how much of an increase would it entail?

I was just curious about this and wondered if any economists had the answers?
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Bavarian Motor Works
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money being made up elsewhere in tax,

more goddamn people on the road etc

doesnt take a flippin economist to work this out surely :confused:
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Erik.
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(Original post by Bavarian Motor Works)
money being made up elsewhere in tax,

more goddamn people on the road etc

doesnt take a flippin economist to work this out surely :confused:
well I wanted to know about the extent of the effect on the tax system - how much taxation in other areas would have to increase to account for the defecit caused etc, would it be a significant amount?
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Hanoi
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It's not worth it to reduce fuel duty that much because we are 'addicted' to it, demand is highly price inelastic (% change in price > % change in demand, eg if price increases a lot, demand will only decrease by a little bit).

Prices of food and goods probably wouldn't fall, inflation would just slow.

Massive budget deficit - we have had that for lots of years

http://upload.wikimedia.org/wikipedi...3/UK_taxes.svg Fuel duty is 5% of tax revenue
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Charlski
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(Original post by Erik.)
well I wanted to know about the extent of the effect on the tax system - how much taxation in other areas would have to increase to account for the defecit caused etc, would it be a significant amount?

It would be a HUGE amount. Also, by abolishing fuel duty, more people would be tempted to drive to more places, thus creating greater congestion, and thus it would cost firms more to deliver goods. This would prettymuch counteract any fall in food/other goods prices that might follow the abolition.
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Hanoi
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(Original post by Charlski)
It would be a HUGE amount. Also, by abolishing fuel duty, more people would be tempted to drive to more places, thus creating greater congestion, and thus it would cost firms more to deliver goods. This would prettymuch counteract any fall in food/other goods prices that might follow the abolition.
I don't think it works like that...why would congestion increase costs to firms?
And fuel is price inelastic, reducing the price that much isn't going to put that many more people on the road.
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Charlski
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(Original post by Hanoi)
I don't think it works like that...why would congestion increase costs to firms?
Yes it does. It's a MASSIVE factor of the A-level Transport paper. More congestion = more time spent on the road, thus greater fuel/maintenance costs. Also, you can now no longer rely on one lorry to do, say four journeys in one day, due to congestion. So you increase your fleet size.

And fuel is price inelastic, reducing the price that much isn't going to put that many more people on the road.
Doesn't work like that with fuel. The price of a good such a fuel going up won't deter people, but the price going down will encourage people.
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