February 20, 2006 | posted by Michael Baxter in Uncategorized |

At periodic intervals our chancellor comes under the wrap for the high price of tax on petrol. Pressure groups protest, and the tabloids jump on the bandwagon. And yet high tax on oil is completely justified in economic theory. The argument goes thus: For the price mechanism to effectively allocate resources the price must reflect the full and true cost of supply. And yet with oil, producers do not pay the social cost, and therefore the interaction of supply and demand distorts price. A tax on petrol, merely restores the balance to what the true market price should be.