The Invisible hand theory of Adam Smith predicts that there will always be some factors which correct the market to its equilibrium without needing the government intervention. But, in fact, the invisible hand doesn’t always work well because in reality, the production and consumption of some goods generate costs (negative externality) or benefits (positive externality) that fall on people besides buyers and sellers, such as air pollution, do need an intervention to correct them to their socially efficient level. Therefore, the government in every country decides to set up the policy, for example taxing or subsidizing, in order to correct these problems.
Taxing on energy fuels appears to be one of the policies the government regarded as ” effective”, the long-lasting problem of a country is that imposing a higher tax on fuels, such as oil and gasoline, always generates tons of complaints from people especially those low-income. According to this problem, two American politicians proposed eliminating the federal tax on gasoline for the summer. The aim of their proposal was to ease the financial burden of sharply higher gasoline prices. This means that the policy will be automatically regarded as “ineffective”. Is eliminating the tax really an effective solution to help the poor?
The fact is that adopting inefficient policy is never the best way to help people in financial crisis. Since efficiency is, however, regarded as one of the most important things in the economy because it means that the utility is maximized. The late economists. Abba Lerner remarked that the main problem confronting the poor is that they have too little money. From my viewpoint, the best solution is not to reduce the prices they pay buy rather to increase their real income, for example, by lowering the payroll tax for low income workers or increasing the earned income tax credit. Since it is, however, necessary to tax forms of consumption, that generate negative side effects, in order to pay for public services. Moreover, the government could also generate revenue from collecting the tax to eliminate budget deficits, as well as help lead resources toward their most effective uses.
In brief, the policy of imposing tax on fuels is the best solution to maximize utility for everyone in the economy even though taxes might appear to be a regrettable evil for citizens like us!