Wednesday, October 19, 2005

Basic Economics - Hawaiian Style

Back when we discussing price controls, I discussed with at least one of my classes the price ceiling on the wholesale price of gasoline that was being instituted in Hawaii. What is our prediction when you institute a price ceiling? Two articles show the expected result:
From the first:
Robinson said Chevron, which prides itself on keeping station tanks full, has had more than 40 "runouts" since the gas cap law went into effect. Robinson said before the gas cap one "runout" a month was considered unacceptable.

The second talks about increased activity for tow trucks:

Several tow truck companies said yesterday the number of "out-of-fuel" roadside service calls have doubled — or more — since Hawai'i's first-in-the-nation gas cap law took effect on Sept. 1.

This adds another level to the effect of a price ceiling on gasoline. If the trend of increased demand for tow truck calls continues, what do you think will happen to the price of those service calls?

As you see from the first article, even though they are seeing the result of the misguided policy, Hawaii is dropping is price ceiling even further next week.

2 comments:

Rebecca said...

The price ceiling causes consumers to make up the gap between willingness to pay and the actual price they are paying. This can be payed in nonmonetary terms such as time, but the second article shows that the price ceiling can actually cause consumers to pay more. Since the cost of gas is higher, people will wait longer to get gas and, therefore, more people will run out of gas on the road. This increases demand for tow truck services (a shift right in the demand curve), which will increase the price of tow truck services. Other industries that are similarly related to gas may behave in the same way, so consumers may actually end up paying more in monetary and nonmonetary costs than without the price ceiling

Anonymous said...

The first article shows that because there is a price ceiling, the quantity demanded is more than the quantity supplied, so there are a lot more instances where the gas stations run out of gas because of shortages. This then causes people to run out of gas on the road in search for a gas station that HAS gas, which then increases the demand for tow truck services. This increase in demand for tow truck services then increases the price. Therefore, the money NOT spended on gas because of the price ceiling is then spended on the tow truck service. Therefore, the price ceiling should not be there because instead of helping consumers pay less, they are instead redirecting the money the consumers pay from gas stations to tow trucks. SO, the price ceiling is ineffective.
-Emily Freebairn