Are ‘Flexible’ Taxation Mechanisms Effective in Stabilizing Fuel Prices? An Evaluation Considering the Italian Fuel Markets

In this paper we study the incidence of specific taxes in the Italian fuel markets, and exploit these findings to simulate the effects of fiscal policies aimed at mitigating oil price fluctuations. We estimate several reduced-form specifications, using as dependent variables the equilibrium wholesale prices for gasoline and motor diesel over the period 1996-2007. In particular, we assess the impact on wholesale gasoline and motor diesel prices stemming from the creation of an automatic fiscal mechanism consisting of reductions in specific taxes matching the rise in oil prices. Our simulations suggest that “flexible” taxation mechanisms could not be a proper policy for stabilizing price levels in fuel markets. A more effective control on prices can be obtained by focusing on the market structure of these industries, where Antitrust Authority could play a significant role.