Let’s imagine for a moment what we want to happen when gas stations are all of a sudden faced with a shortage of gas.
We would want to encourage consumers to consume less gas. There are several ways they could do this. For trips they absolutely need to take, they could carpool much more often than they used to. There might be a whole set of trips that they decide they shouldn’t take right now, during this time of increased scarcity, so as not to reduce the overall supply further.
We would also want to encourage suppliers to divert from their usual routine to bring more gas to the area with the shortage.
So how do we get to a world where this is what happens during a shortage? Do we have to make laws about how gas is allocated nationally? About how many miles people are allowed to drive, or what the minimum number of passengers per car needs to be? Or more directly, how much gas per person we’re allowed to consume?
The Ideal Policy
In fact, there is a much more elegant solution, totally uncontroversial among economists and proven by the American experience of the 1970’s: just allow prices to rise. As soon as the price controls begun by Nixon were overturned, gas lines in America became something mostly confined to history books.
I say mostly because every so often, after a disaster like Sandy, we hear about gas lines cropping up temporarily again. But surely this is inevitable, right?
Wrong. What has happened consistently in these scenarios is that prices have not been allowed to rise.
You might ask how can economists be so cold and unfeeling as to say that the victims of a disaster should have to pay higher prices. Well, let’s do a little thought experiment.
What would happen if prices in New Jersey shot up to an astounding $20 per gallon?
The person who was thinking of doing a 5 minute drive instead of a 30 minute walk might opt to walk instead, since filling up will be so expensive. The group of friends all going to the same place a 30 minute car ride away or farther might all pool their money to pay for the gas. In other words, people will economize on their gas usage.
Meanwhile, since they are paying the cost in money rather than in time spent in gas lines, gas stations will be gaining more funds, which in turn will allow them to outbid gas stations outside of Jersey for additional supply. The influx of supply will eventually–and history has demonstrated that this can happen surprisingly quickly–start bringing prices back down.
In short, during a shortage the price system both forces people to reduce their consumption and bids additional supply towards the area that needs it the most. In other words, it accomplishes exactly what you would want to accomplish during a shortage.
Every alternative to the simple solution of relying on the price system has proven itself pathetically inept. In the 1970’s they tried a whole gamut of different regulatory allocation approaches, and nothing worked until the price controls were ultimately revoked entirely.
It is frustrating that we still have not learned this lesson. But I suppose history has also demonstrated that we are terrible at learning from repeated failure.
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