Market Power

Non-price Rationing of Gasoline

The scarcity problem:  resources, and by extension the goods and services made with them, are more scarce at any point in time than the amount humans want.  Therefore, stuff must be rationed.  When the price system, for whatever reason, fails to work as a rationing system, something else must take its place.

With long gas lines persisting more than a week after Superstorm Sandy, New York imposed a gasoline rationing plan Thursday that lets motorists fill up every other day.

Police will be at gas stations Friday morning to enforce the new system in New York City and on Long Island. Gas will be available to drivers with license-plate numbers ending in an odd number or a letter on Friday. On Saturday, drivers with license plates that end in even numbers or zero can fuel up.

 

Post-Sandy Non-price Gas Rationing

Belleville officials have passed an ordinance rationing gas — the kind of law not seen in these parts since the national gas crisis in the late 1970s.

The ordinance, approved Thursday night, will take effect Monday.

The last digit on the license plate number of Belleville residents will determine what day they can purchase gas. Odd numbers will correspond to odd days and even numbers to even days, according to the ordinance.

Monday, when the new rules take effect, is an odd day.

Those looking to fill canisters will need to bring identification that has their address. The last digit on their address will be used to determine which day they can purchase gas.

Story here.  As mentioned earlier on this blog, New Jersey has an anti-price gouging law that governor Christie has been waving around in the wake of Sandy.  The result has been predicable.

Man Pulls Gun at Gas Station

It's another gas line story from Sandy's wake.  The video is here.

John Stossel on Price Gouging

 

The video features economist Russ Roberts and cameo appearances by Nobel laureate economists Gary Becker, Vernon Smith, and the late Milton Friedman.

I use price anti price-gouging laws as an example of price ceilings.  By threatening firms with penalties if they raise prices "too much", government makes prices upwardly-sticky.  By not allowing prices to rise, government takes away the primary incentive that drives people to supply gas, water, generators, and all the other things desperately needed when natural disasters hit.

And the Lords Said, Thou Shalt Not Price Gouge

Yay.

And the people waited.  

Does time have no value, oh those who think price "gouging" is a bad thing?  Apparently not, especially when it's not your time that's being wasted.  Other people's time/money/stuff, and whatnot.

 

Hurricane Irene Economics: North Carolina Price Gouging Law Now in Effect

The good folks at @severestudios tweet:

RT @NCAGO: NC price gouging law now in effect. If you spot gouging, report it at www.ncdoj.gov. #NCIrene

Long-time readers know I am no fan of price gouging laws because prices of many items and services are naturally going to spike when natural disaters hit.  The demands for things like bottled water, construction services, hotel rooms etc. necessarily increase dramatically when, at the same time, the local supplies of these goods get restricted.  The simultaneous increase in demand and decrease in supply necessarily leads to higher prices as buyers try to get what they want and sellers try to allocate what they have.  

Price gouging laws act a bit like price ceilings by limiting the ability of buyers and sellers to trade above some "high" level.  But what's high?  What's "charging too much"?  What's unfair?  Who's to determine what's high and what's unfair?  How are scarce resources supposed to get allocated to get people what they want?  

If anything, these laws make it more difficult for people to get bottled water, construction services, hotel rooms, etc. in a timely manner.  If someone offers to sell someone else a bottle of water for $15, let the buyer decide whether that's fair or unfair.  

If someone offers to clear a tree off a house for $20,000, perhaps that person already has a lot of work to do, meaning the opportunity cost of taking on additional work is very high for him.  Why shouldn't he be allowed to charge a high price? 

While the anti price gouging laws may sound like a good idea, in reality they do little but hamper relief efforts.

Do Price Gouging Laws Drive Prices Higher?

Hurricane Ike made landfall overnight on Sept 12/13, 2008.  In the days before that, there were reports of gas price gouging and governors of several states declared states of emergencies which put anti gouging laws into action.  Four of these states were North Carolina, South Carolina, Arkansas, Alabama, and Tennessee. 

I went to minnesotagasprices.com and plotted some data to see the what happened to gas prices in those states.  For reference, I add gas prices in Oklahoma and Texas, two states that have not been active in going after so-called gougers.  I also add the price of a barrel of crude oil to standardize the look of the graphs.  Here's the screen shot from 5:10 PM on 9/15 for Texas, Arkansas, and Oklahoma.

Click on the image for a larger version.  Even though crude oil prices have fallen, the price of gasoline rose in all three states as Ike neared the Gulf coast.  But the price increase was higher in Arkansas that in Oklahoma or in Texas.

Here is the plot for North Carolina, South Carolina, and Texas taken at 6:44 AM on 9/15.

The average price of gasoline rose in all three states, but it spiked in North Carolina and South Carolina.  Texas was directly hit by Ike, the Carolinas were not.

Here is a plot for Houston, Knoxville, Tn. and Mobile, Al. taken at 5:03 PM on 9/15.  All cities saw the average retail price of gasoline increase, but it spiked in Knoxville (and there were reports of shortages).  The average price of gas rose faster in Mobile than in Houston. 

Lastly, here's Houston, Charlotte, NC, and Columbia, SC taken at 5:14 PM.

Similar story.  Gas prices rose in all three cities, but they spiked in the two Carolina cities.

What seems to be the lesson here regarding these particular price spikes?  Aside from the other effects of Hurrican Ike, effects that also drive prices higher, it seems that the gas price gouging laws impose an added cost on gasoline retailers:  a potential fine that they'll have to pay if they are deemed to have increased their prices "too much" (as well any expected costs of defending themselves).  The result is less gasoline on the market and higher prices to consumers than in the absence of the gouging laws, all else equal.  It seems that instead of keeping gas prices low, they actually drive gas prices higher in states of emergencies.

Rationing by Waiting in the Gasoline Market - Queues Form Due to Price Gouging Laws

Here's another effect of gasoline price gouging laws:  waiting lines.

On Friday, some stations ran out of fuel, some raised prices dramatically and some asked customers not to buy too much gas, said David Parsons, president and chief executive officer of AAA Carolinas.

“The run on gas stations in both Carolinas is creating a crisis before one actually exists,” Parsons said. “We are making a possibly bad situation reality when motorists top off their tanks.”

But by Friday afternoon, some stations in North Carolina were charging nearly $5 a gallon for regular unleaded and more for premium, and some in the Wilmington area were saying $5-a-gallon gas might be just hours away.

And it was apparent by the long lines at many Wilmington-area gas stations that many local residents weren’t taking AAA’s advice. Frank Johnson was one of the many hedging his bet and filling up his tank just in case Ike caused prices to go any higher or gas stations to start running dry.

Gas Price Gouging Laws Create Shortages

As hurricane Ike travelled through the gulf, refineries shut down and threatened residences scurried to fill up their tanks and their generators.  In what looks like a textbook example, this simultaneous shift in demand (increase) and supply (decrease) has forced the price of gasoline upwards in many states.  But the price gouging laws have predictably led to shortages in some states.  Via Cafe Hayek comes this story on gas shortages in Tennessee:

Knoxville-area drivers are seeing more bags on gasoline pumps today as a petroleum shortage spreading throughout the Southeast hits local gas stations, groceries and convenience stores.

Refinery outages along the Gulf Coast in the wake of Hurricane Gustav have created severe shortages, causing retailers like Weigel's to scramble to keep their pumps flowing. And Hurricane Ike is bearing down on Texas, drawing a bead on North America's petroleum manufacturing capital of Houston and portending a worst-case scenario for dealers and consumers.

"Knoxville has been out of gas since Monday. We've been buying gas from Atlanta, North Carolina, Kentucky, anywhere we can get it," said Bill Weigel, head of the Weigel's chain of convenience stores in Knox, Blount, Sevier, Loudon, Anderson and Monroe counties.

Weigel said Thursday about a half-dozen Weigel's stores are out of gas, including Oak Ridge locations, and he fears that number will grow as gasoline shipments from Louisiana and Texas refineries through a network of pipelines are disrupted.

I've said it before and I'll say it again.  Gasoline is scarce, relative to the amount people want, and must be rationed.  Here we have an unusual event that decreases the supply sharply and increases the demand sharply.  But by trying to "do something", politicians who voted for these laws have now made it more difficult to get gasoline in these states because raising prices now carries a penalty.  How, then, is gasoline to be rationed?

HT to Kip in the comments to this post.

Reporting Price Gouging of Gasoline Stations

From the comments to this post:

Where can we report gas stations that are price gouging when a hurrican is in the gulf?

To competitors who are not.  They'll be happy to hear it. You might also try reporting  it to texasgasprices.com so that customers can be informed.  That will do more good than reporting it to some government agency.

Never mind that these things have been investigated by government before, and the search turns up empty.

Gasoline is scarce and must be rationed somehow, someway.  If everyone is told to evacuate an area, it becomes even more scarce  in that area.  If we don't allow the prices of gasoline to rise, how then is it to be rationed?  And, pray tell me why that way of rationing is better than using prices.