by Algy Moncrieff

Created on: July 13, 2009   Last Updated: July 17, 2009

With gas prices steadily rising year on year there is plenty of reason to be worried. The finger of blame, as with most problems with the economy, points to the government, and its high fuel taxes. But should we really be so outraged?

The difficulty is one of fairly simple supply and demand. We all drive to wherever we need to go and because it makes life really simple, we are happy to burn vast amounts of gas and ignore the consequences. Furthermore, because we rely so heavily on fuel for everything in our daily lives, we will not cut back hugely on our consumption of it even if the price goes up. And up. And up.

Couple this with dwindling supplies made even smaller by limitations agreed upon by OPEC (Organisation of Petroleum Exporting Countries), add about 50p of tax for every pound spent on gas, add a few more pence that the gas company thinks they can squeeze out of you and there you have it: the price you pay at the pump. It's very high.

Unfortunately, there's little to be done about supply and demand. Supply is limited by the earth's resources and the abilities of drilling companies to get the oil out of the ground. Demand will inexorably rise as the world's population increases and countries become more developed. Thus there are only two missing links when it comes to the question of why the price is so high: tax and technology.

The question is this: when we pay road tax and value added tax and income tax and council tax already, why do we need to slap a hefty fuel tax on top as well? According to the Association of British Drivers (ABD), remove all the tax and currently a litre of petrol should set you back about 40p. Instead prices are rapidly nearing 1.10 a litre. If road tax has paid for the maintenance of the road, and VAT has helped the government provide the services we rely on in every day life, what does fuel tax pay for?

In economics there is a concept known as externalities. This is the idea that consumption of some goods can have unintended consequences - good or bad. Eat a banana and you'll be (potentially) happier and healthier. What you didn't intend though when you bought it, was the saving to the NHS of not having to look after you as much, or the savings your boss makes when you take fewer days off sick.

The same goes for gas: you put it in your car to benefit yourself. Unfortunately, it harms others, and this is where the high tax rate comes from - partly to reduce the amount of gas burnt and therefore the amount of unpleasant emissions,

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