Calblog: Price Controls on gas

August 31, 2003

Price Controls on gas

This week, Cruz Bustamante suggested price controls on gasoline and, as the Bee reported, "experts" jumped all over him. Do you remember or have you read about the gas lines of 1974? I remember them. People sat in lines for hours for a turn to buy gas. Even numbered plates could buy on one day and odd numbered plates could buy on another day. We didn't drive much and I remember my mother filling up in odd places whenever she saw a short line on those occasions when we did drive.

I recently read an amazing factoid in Basic Economics A Citizen's Guide to the Economy by Thomas Sowell (a fine book recommended to me by Prestopundit). In the year of the shortage, we used only 3% less gas than the year before and more gas than any other year before that. Some shortage, huh?

Because prices were limited, no one curtailed their driving (we didn't drive a lot but we didn't drive a lot before that) and demand remained high, while supply, although not at any REAL shortage levels, was less than that demand and there was an artificially imposed shortage. It also turns out by limiting profits, stations cut expenses. Hence the development of self-serve and the limiting of operating huors. SO even if there was enough gas, stations were only open a few hours a day and if you wanted your share of the cheap gas, you had to wait on line.

For a shorter look at price controls and shortages, Sowell has a very readable article here.

Maybe the other side has a good argument in favor of price controls. All I ever here from the politcians though is "we're paying too much. We can make it cheaper so we should."

Posted by Justene Adamec at August 31, 2003 10:51 AM | TrackBack

Comments

I think what you hear the pols saying answers Hewitt's question in the previous post. Anyone with a grasp of economics would argue that if there's a shortage -- whether of supply or merely of availability as in 1974 -- you're not paying too much, you're paying too little.

Posted by: McGehee at August 31, 2003 04:33 PM (Permalink)

Price controls only make sense in markets which (a) are monopolies; (b) have a high barrier to entry (preventing new entrants from competing with the monopoly); and (c) exhibit extremely low price elasticity of demand. (Classic example: railroad transit rates in the late nineteenth century, which satisfied all three conditions).

Gasoline exhibits low price elasticity of demand and the *wholesale* provision of gasoline has extremely high barriers to entry. However, the gasoline market is far from being a monopoly, so the case for price controls is weak at best. It's made even weaker by the global nature of the market; attempts to control California's market will simply cause the goods to be sold in other markets which don't have controls.

This is a bad idea i've been meaning to blog about but haven't gotten around to yet because online time is limited during the weekend. (It might increase, though, as Jared now has grading to do on the weekends. :))

Posted by: aphrael at September 1, 2003 12:32 PM (Permalink)

Let's see

1. Gas retail prices controlled and fixed low
2. Low prices encourage excess consumption, and investments based on artificially low price.
3. Supply bottleneck - Cal. gas market not transparent to outside supply (due to specialized enviro regs)
4. Cal has no control over component costs, e.g. crude, refineries down, etc.
5. Crude skyrockets due to ?
6. Control edifice "blows up" along with its economic co-dependents.