Bryan Caplan  

Gas: What's the Big Deal?

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Prof. Steve Miller... Bryan, Read Thyself...

Jane Galt tries to explain why people freak out about gas prices.

My thoughts:

1) Most Americans buy gas at least once a week

2) They buy a lot of it

3) They buy it by itself--if the price of milk or orange juice rises, it gets lost in the overall grocery bill, which is still falling in real terms.

4) The price is visible and because demand is almost completely inelastic, little effort is made at price discrimination--there are no coupons for cut price gas.

5) There is relatively little variation in gas prices compared to, say, generic food/drugs vs. name brands.

6) Gas is heavily implicated in other consumption. When the price of milk rises, you stop drinking milk and start drinking calcium-fortified OJ (or vice versa). When the price of gas rises, you stop going to the movies and start watching the science channel.

7) There are very few good substitutes for gasoline consumption.

8) It is relatively difficult to cut back on gasoline consumption, because commutes and things like grocery shopping make up so much of the total, and people only purchase new cars once every few years, if that.

Roughly speaking, (2), (4), (5), (6), (7), and (8) are economic explanations, while (1) and (3) are psychological explanations.

The psychological route is ultimately the only one that makes sense. You can say that people buy "a lot" of gas, and that there "are very few good substitutes," but the fact remains that the average American household with an automobile still only spends about 5% of its income on gas. The change in expenditure as a percentage of income is far smaller - middle income consumers went from 3.6% in 1999 to 4.4% in 2005 - a whopping .8% of income.

If we lost .8% of income through inflation, most of us wouldn't even notice. But when we lose .8% of our income on a product that we buy at a specialized store (a "gas station") at regular intervals, we not only notice; we blow it all out of proportion. Perhaps more importantly, we feed on each other; since it's noticeable, we talk about it with other consumers - like I'm doing now - and egg each other on.

Yes, it looks like we've got another example of an availability cascade on our hands. Best... neglected... model... ever.


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COMMENTS (3 to date)
spencer writes:

I was surprised that in your comments on her blog you appeared to favor, or at least not oppose, a windfall profits tax.

Jüri Saar writes:

Those interested in reading the availability cascades article "Availability cascades and risk regulation" by Timur Kuran , Cass R. Sunstein can access it for free through HighBeam Research HERE.

They have a free 7-day trail which requiers a credit card, but the membership can be easily cancelled.

Mcwop writes:

9) The Media and politicians constantly focus on gas prices above certain levels, where you don't see high milk prices on the front page.

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