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When Markets and Mobility Collide

Many people, including economists, wonder why a scheduled 3% fare increase on the Santiago metro triggered mass protests that paralyzed the entire country. In fact, the popular response should come as no surprise, and understanding it is crucial to devising better policy solutions.

WINDHOEK – Gasoline is supposed to be combustible. But why has it also become politically explosive, as the eruption of massive protests in Ecuador and Chile suggests?

While the Ecuadorean case involved a significant increase in the price of gasoline, the revolt in Chile was triggered by a puny 3% scheduled increase in fares on the Santiago metro. Whether or not foreign meddling was involved, the fact remains that the protests, if not the accompanying violence and destruction, have had significant public support.

The economic case against gasoline subsidies seems ironclad. Subsidies are inefficient because they lead to consumption benefits that are worth less than what it cost society to provide them. They are environmentally harmful because gasoline consumption generates negative externalities: not only global warming, but also local pollution, congestion, and road degradation. (If anything, gasoline should be taxed in order to take account of these costs.) And they are deeply unfair, because the rich consume more gasoline than the poor, meaning that they get a bigger chunk of the subsidy.