This article explains why the output effect of a severance tax on oil is not generally reversed when the tax is removed. It is shown that this severance-tax-induced irreversibility in supply has important implications for both the interpretation and estimation of the supply of oil. Specifically, severance taxes cause a path dependence in supply that makes the concept of a supply curve for oil ambiguous. The authors provide estimates for the case of Kansas that indicate that the magnitude of the irreversible effects of severance taxes is large.
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