Gasoline-powered vehicles produce many negative externalities including congestion, air pollution, global climate change, and accidents. A gasoline tax is perhaps the best policy to jointly address these externalities. This paper calculates the optimal gasoline tax for China. Using a model developed by Parry and Small [1] [2], we calculate the optimal adjusted Pigovian tax in China to be $1.58/gallon which is 2.65 times more than the current level. Of the externalities incorporated in this Pigovian tax, the congestion costs are taxed the most heavily, at $0.82/gallon, followed by local air pollution, accident externalities, and finally global climate change.

Keywords: Gasoline tax; China