Arnold Kling  

I'm in favor of gas price ceilings

Dear Prudence... Nasty, Brutish Looting...

The price gouger's best friend is my colleague Don Boudreaux. His latest letter-to-the-editor (he emails these to those of us on a distribution list, whether they wind up published or not) puts it quite succinctly.

Byron Kass correctly notes (Letters, Sept. 1) that as soon as gasoline's wholesale prices rise, retailers raise prices at the pump even on gasoline that they bought earlier at lower wholesale prices. Mr. Kass calls this practice "gouging" and wants government to investigate.

I wonder if Mr. Kass owns a home. If so, would he wish to be investigated for gouging if he sold his home for a price higher than the one he paid for it?

In my Economics for the Citizen class today, I tried to explain that if the futures price indicates that next week gasoline will be at $3.00 a gallon and you as a dealer bought it at $2.00 a gallon, it is neither in your interest nor society's interest for you to sell your gasoline at $2.00 a gallon.

I suggested that the best policy now would not be a price *ceiling* to hold down the price of gas, but a price *floor* to immediately raise it to a level that would slow panic buying. My idea is to have the government recommend a price per gallon of $6 through Labor Day, $5.50 from then until October 1st, and $5.00 for the month of October. The idea of having a pre-announced, staggered schedule is that it reward the people who put off buying gas and punish the idiots who are rushing to top off their tanks.

My experience with presenting the proposal in class is that it would be difficult to make it credible. That is, many students thought that such an announcement would be interpreted at a gut level as "Gas prices are going up! I have to buy now!" Indeed, several students predicted that this would be the reaction.

One approach might be to announce the recommended prices as ceilings. Perhaps people would believe that the government would stand behind a ceiling that is scheduled to drop from $6 to $5.50 to $5. And perhaps those who are intelligent enough to know that ceilings cause shortages would also know that when a ceiling is set high enough it is not binding and therefore will not cause a shortage.

I do believe that for the next few months, we need to curtail unnecessary driving. And we also need to do something to tamp down panic buying by idiots. That is what motivates my price "ceiling" proposal.

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CATEGORIES: Price Controls

TRACKBACKS (3 to date)
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The author at The Crooked Links in a related article titled In praise of price gouging writes:
    "...let's all do our part by grinning and bearing higher oil prices..." [see also, see also]... [Tracked on September 2, 2005 3:32 AM]
The author at The Club for Growth Blog in a related article titled Friday's Daily News writes:
    Weeping for New Orleans - Don Boudreaux, Cafe Hayek Katrina and Gas Prices - Skip Sauer, The Sports Economist Gas Price Surge No Conspiracy - AZ Republic Editorial Gas Price Ceilings - Arnold Kling, EconLog How To Create A Shortage... [Tracked on September 2, 2005 9:32 AM]
The author at Web Log in a related article titled Punish the "Idiots" writes:
    I do believe that for the next few months, we need to curtail unnecessary driving. And we also need to do something to tamp down panic buying by idiots. Note bolded (my emphasis). This comes from a supposed "free market"... [Tracked on September 11, 2005 9:20 AM]
COMMENTS (11 to date)
Paul N writes:

I honestly do not get it. I do not get why AK can assign some resource use as good and other resource use, at the same market clearing price, as bad. I do not get why any economist would propose forcing artificially high prices as an optimal solution. The whole point of supply and demand is that decreased supply or increased demand raises prices automatically. Consumption of gas cannot be a bad thing in and of itself. Doesn't anybody notice this? I feel like I'm taking crazy pills!

Arnold Kling writes:

Right now, as soon as someone starts a rumor that gas prices are going to shoot up in some town, it starts a run on gas and everyone fills up their tank. It's a free market, but the people taking crazy pills are in charge of the asylum.

I think that a good policy would be to let the market run its course. But it might be somewhat better to squeeze the idiots for a few weeks, so that the rest of us won't get stuck in enormous gas lines caused by panic attacks.

tdl writes:

Prof. Kling.
Isn't this panic buying equivalent to what happens in the financial markets when an extreme event occurs? The "crowd" panics and sells or buys and prices revert back to rational levels within a week or two without and government intervention. Supply and demand works in these markets, why should energy markets (or any markets) be any different? Isn't this just an immediate gratification argument? Price controls stave of pain for the first few weeks than inflict greater pain in intermediate and longer term.


Phil writes:

But wouldn't the increased demand prompt the gas companies to up the price themselves? Why do we need government to jack up the price for them?

Arnold Kling writes:

"Why do we need government to jack up the price for them?"

a) because it's better than jawboning them to hold down prices by threatening them with charges of price gouging
b) to convince the public that prices are not headed up further. As long as people feel like the way to react to the situation is to stock up on gasoline, the fear of shortages will be self-fulfilling. My hope is to break that cycle.

Chris Bolts writes:

Agreed, Professor Kling. Here in Arizona, when one of the pipelines ruptured people frantically began buying gas as if there was never going to be any gas, despite the fact that gas was still being trucked in from other states. You don't need price controls in place to force people to change behavior; the mere mention of a shortage will drive people into a panic and they'll start buying up as much fuel as possible. So it wouldn't be too bad to implement a price ceiling at $6 a gallon and have it decline to "punish" silly drivers who think that the gas has all gone and reward those who actually are prudent enough to know that enough gas is available.

That said, I'd still be against it because I'm against government involvement in people's lives. And besides, I think a more fitting punishment for those naive folks was having to stand outside in 100+ degree temperatures. :)

Bob writes:

I sorta agree with Chris because I think it's generally a bad idea to let the gov meddle in the economy. Once you get into the debate over whether it "makes sense" *this* time, you're in trouble. Put another way, the long-term cost of letting the gov overrule the market is sure to outweigh any short-term benefit because you've opened Pandora's Box.

Bob Knaus writes:

I've heard repeatedly that the primary source of temporary gas shortages is vehicle owners rushing out to top off their tanks. Here's a back-of-the-napkin calculation showing how this might not be true:

There were about 210 million registered cars and light trucks in the US as of 2000. Let us assume the average gas tank holds 15 gallons, and on average is half full. Let us also assume that (unlike Europe) the proportion of diesel vehicles is negligible. If every vehicle topped off its tank, that would be 210 x 7.5 = 1.575 billion gallons of gasoline.

In June of this year, prime suppliers provided 399 million gallons per day(scroll down to 2nd page).

1.575 billion / 399 million = 3.9 days supply of gasoline if every vehicle topped off its tank.

Now I don't know enough about the capacity of our nation's gasoline supply system to say whether that amount of demand would be enough to trigger widespread shortages. But intuitively, it seems that building in 4 days storage capacity to the system would be no big deal. In fact, the sort of thing that wholesalers would already have done, because they could then profit by having the gasoline available at a higher price during any kind of supply or demand anomaly.

Peter writes:

to create a change in unnecessary driving you need to create a schock, small price increases/decreases cause people to adjust and get used to it with the result that you will see no change in behaviour. A shock price increase will cause people to change behaviour but who will be in favor of that?
(By the way, did i understand it correct that a price ceiling should be interpreted as a price floor?)

Brad Hutchings writes:

Here's the "problem". Yes, gas is comparatively an arm and a leg compared to a year ago. Supplies are tight. In some parts of the country, particularly in the South, people are jumpy. But where I am in So Cal, with regular unleaded at $3/gallon, dinner for two at Outback is still a little more expensive than a tank of gas that will last me 2 weeks. The difference in price from a year ago is about 2 venti frapuccinos at Starbucks. A friend of mine who drives 100 miles round trip each day to work spends less on gas each day than the two of us going to Arby's for a sandwich on his day off. Nationally, this shortage is a minor problem, reflected in a moderate premium on prices that seems to be managing the shortage well enough. Talking about non-essential trips is alarmism.

I love Bill O'Reilly's suggestion... nobody buy gas on Sundays. Show the oil companies what power we all think we have. Not that anyone will do it, but if they did, imagine the lines Monday morning when we all stop holding our breath. How about if we just all calm down? This will pass. Or maybe direct our anger at the NIMBYs who have stalled refining capacity?

Brad Hutchings writes:

Hey Arnold... I was reminded by an old high school friend that California once had price ceilings on gas. 1986-ish, $1.50/gal for regular unleaded. There was a "Shortstop" down the street that was always priced up near the ceiling, but always had nice window squeegies, tire air, etc. and was open 24 hours before any other stations were. They had a sign on their window protesting the price ceiling, saying that they might not be able to provide the services and hours of operation if their wholesale costs creeped up. So you might be able to find some data to test your hypothesis!

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