Sunday, September 28, 2008

Gas Shortage

Over the past few days there has been a shortage of gasoline where I live. And I find myself wishing that I could give one lesson in economics to everyone around me. That lesson would be: let the prices rise. It seems that very few people agree with me on this point.

I recently saw this article:
N.C. Attorney General Roy Cooper issued three additional subpoenas today to the owners of three gas stations, including two in Yadkinville.

Two weeks ago, Hurricane Ike pounded the south Texas coast and disrupted gas deliveries from many oil refineries there. Because of the storm, retailers are getting much smaller deliveries than they expected, said Carol Gifford of the AAA Carolinas office in Charlotte.

"Consumers deserve to be treated fairly when they fill up," Cooper said in a statement. "If we uncover evidence that Hurricane Ike was used illegally to run up prices and gouge customers, we'll take legal action."

The attorney general's office sent a letter to Mohamed Nasrallah, the president of LR&S Inc. of Winston-Salem, which owns the Four Sisters Center and the Yadkinville Food Mart, both in Yadkinville. The letter demands that Nasrallah produce documents about fuel deliveries and prices at the stations.

Last week, the attorney general's office sent subpoenas to the owners of 23 stations who were reported to have sold gas for more than $5.35.
Letting the price rise sends a signal to people who are irrationally panicking. It tells them to conserve since they don't really need the gas. And they get the signal because the price is so high. Leaving fuel behind for those who desperately need it. But if you don't let the prices rise, the irrational will not get the signal. And those who really do need it won't be able to get it for any price since it will run out.

Of course all of this is a consequence of anti-price gouging laws. Those laws which were intended to keep the price of gas from rising to $5.35/gal actually raise the price to infinity.

Now, of course, there is the fear that gas stations will get rich off the rest of our misery. I understand that fear. But two comments:
  1. The station owner also owns the gas. Until you come to an agreed upon price, you don't have any right to it. Further you have no right to force a price on them. Doing so violates their property rights.
  2. People who sell a commodity product can not, in the long run, keep the price high. So while the station owners may make a bundle in the short run, that profit will encourage others to show up with better prices. And (miracle of miracles) increase the supply. When you force the price lower, no one has any incentive to bring in new supply. So, no one does.
Prices send two signals, one to the consumer that tells them about the relative scarcity of a good. When it's expensive, conserve. When it's cheap, consume. And it sends a signal to suppliers, when prices are up, add supply. When prices are down, don't add supply.

Price is the point at which supply and demand meet. If you don't allow it to float, one or the other (or both) will be disrupted.


Anonymous said...

Aren't price caps in place to protect commodities which have inelastic demand? You need gas to get to work. You'll buy gas at $7 per gallon if necessary.

Suppose merchants A, B and C set the price of gas to $7.00, when supply is severely constrained. When the supply returns to normal, merchant D will make enough money at $7.00 per gallon, that there is no motivation to lower it to $5.00 to gain the extra demand.

What am I missing?

mjh said...
This comment has been removed by the author.
mjh said...

Comment deleted. See my follow-up post.

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