Optimal Gasoline Tax in Developing, Oil-Producing Countries: The Case of Mexico

This paper uses the methodology of Parry and Small (2005) to estimate the optimal gasoline tax for a less-developed, oil-producing country. The relevance of the estimation relies on the differences between less-developed countries LDCs and industrial countries. We argue that lawless roads, general subsidies on gasoline, poor mass transportation systems, older vehicle fleets and cities’ unregulated growth make the LDC tax rate differ substantially from rates in the developed world. We find that the optimal gasoline tax is $1.91 per gallon at 2011 prices and show that the estimate differences are in line with the factors hypothesized. In contrast to the existing literature on industrial countries, we illustrate that the relative gasoline tax incidence may be progressive in Mexico and, more generally, in LDCs.