Hurricane Katrina has stirred up the debate about gasoline taxes. Some are suggesting that we should cut the gasoline tax to reduce the price at the pump.

Alex Tabarrok at Marginal Revolution argues that any reduction in the gas tax will simply line the pockets of the gas sellers and will do nothing to lower the price to consumers. And he is right. At least he is right in the very short run. In the language of economists, the supply elasticity in the short run is near zero--meaning that the supply of gasoline is what it is and can't respond to changes in prices (or taxes). This analysis is quite accurate right now. With a number of refineries down or damaged and the rest running at capacity, there is no way for the supply of gasoline to increase even if the gas tax is reduced (or if the price rises). The purpose of prices in this context is not to stimulate supply but to ration the good among demanders.

In the long run, however, the elasticity of supply is probably very elastic (maybe infinitely so) and lowering the gas tax should lower gas prices in the long run. The problem here is that the long run in this market takes decades to play out as it can take 10 years or more to build a new refinery and thanks the the radical environmentalists we haven't invested much in new refinery capacity in the last generation.

Bottom line: cutting the gas tax will not lower the price of gasoline in the near term, but could in the long term if the suppliers are allowed to expand refining capacity.