Monday, September 12, 2005

Gasoline Prices and Common Sense

Several actions and calls for action from politicians and pundits regarding the recent escalation of gasoline prices have ranged from the ineffective to the bizarre.

First-the ineffective. Governor Sonny Perdue of Georgia recently rescinded the state’s gasoline taxes in order to provide “relief” to the citizens of the state. One problem with this action is that a portion of the tax relief will go to the providers of gasoline. Without boring our readers, one can show that unless consumers are entirely unresponsive to changes in the price of gasoline (e.g. perfectly inelastic demand for you economists), the benefits of the cut will be shared by the consumer and the provider. The more unresponsive consumers are, the larger share of the benefit that will end up in the coffers of the oil industry. A second problem with this action is that it discourages conservation of a resource that is now in short supply due to Hurricane Katrina. Some economists might even argue that what the governor should have done is to raise the tax to help alleviate the shortage.

Second-the bizarre. We are again hearing calls for price controls from some prominent conservatives, such as Fox’s Bill O’Reilly, and liberals such as (the list is too long). These individuals have both a poor memory and lousy analytical skills. They have forgotten the long lines and shortages produced by President Carter’s price controls in the 1970s, and are analytically challenged for failing to recognize that setting the price of a product below the market equilibrium price means that producers will supply less of it and consumers will demand more of it. (It’s called the LAW of supply and demand for a reason—sort of like gravity---deal with it). Price controls will also result in another socially undesirable outcome---an underground market for gasoline. Think of the number of economists we will have to hire to administer and police this pointless activity and/or program. We can call it—no economist left behind (NELB).


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