The Right Coast
August 26, 2005
Too Much Sunshine
By Mike Rappaport
What is wrong with Hawaii? They are preparing to impose a price ceiling on gasoline. Gee, what do you think will happen? Actions like this convince me that the political process is often about the immediate reactions of the ignorant -- helped, of course, by cynical rent seeking interest groups:
Actually, because the price ceiling is to be imposed on wholesalers, its effects are more complicated than a normal ceiling. Jane Galt considers the possibilities. But note: neither of them benefits consumers with more gas at lower prices:
In traditional economic theory, when prices are capped, consumer demand keeps going strong but suppliers curtail supply, leading to the shortages that those who were sentient in the seventies will remember--long lines for gas, alternate day gas purchases, and so forth. More recently, this is basically what happened in the California blackouts, although there were added wrinkles there due to defects in the regulatory setup of the electricity market. I'm not sure what happens if you cap wholesale prices. There are two plausible scenarios. Wholesalers will undoubtedly curb supply in response to the price caps. The resulting mismatch between supply and demand could simply result in higher prices as consumers get into a bidding war for the available gasoline; in that case, the market will clear, and a handsome windfall profit will be transferred to gasoline station owners from the pockets of consumers and wholesalers. Or, the gasoline station owners may be afraid to raise prices for fear of attracting regulatory attention, in which case the result will be shortages and rationing. I'd bet on the former, and would also bet that there is a powerful gasoline station owner's lobby which has been agitating fiercely for wholesale price caps.