# Taxes and Prices

Suppose there is an
auction for a pearl.  The person with the highest demand is willing to
pay \$5000 the person with the next highest demand is willing to pay
\$4999.  The winner must pay a tax of \$1000 to the government.

With
the tax the two bidders bid until the price reaches \$4000 at \$4000
(note that \$3999+\$1000 tax= net of \$4999) the low bidder drops out and
the high bidder wins.  Total price to the high bidder is \$5000, \$4000
to the seller and \$1000 to the government.

Now with no tax a
price of \$4000 leaves two bidders in the ring so the price must rise
higher.  In fact, the price must now rise to \$5000 to get the second bidder
to drop out.  Final price to the high bidder is \$5000 – the seller gets
\$1000 more in revenues and the government gets nothing.

If one wants to challenge the gas-tax argument then to place to do so is to argue that a temporary reduction in the tax, leading to more profits for the oil companies, will stimulate supply enough to have a significant effect on reducing price.  Any other argument is incorrect.

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