ABSTRACT
Changing fuel prices and new energy policy initiatives have heightened interest in the appropriate level of gasoline taxation. These taxes vary dramatically across countries: Britain’s tax of 50 pence per liter in 2000 is the highest among industrial countries, while the United States, where federal and state taxes averaged about 40 cents/gal, has the lowest rate. A counterargument to the externality rationale is that, except for carbon dioxide, it would be better that a tax be placed on something other than fuel: local emissions, peak-period congestion, or miles driven, preferably with a rate that varies across people with different risks of causing accidents. Welfare effect of replacing the initial fuel tax by a vehicle miles traveled (VMT) tax at the rate shown. It is obtained first by calculating the welfare change from reducing the fuel tax to zero, then adding the welfare change from increasing the VMT tax to the value under consideration.
