Scarcity is the Problem. Price Rationing is One Answer

So, I've been getting quite a few incredulous, scornful, and even insulting emails from folks who object to the idea that prices should be allowed to rise to "solve" the gas problems in the northeastern U.S.  The majority of my argument has been to claim that price will (1) induce people to buy less, thereby leaving some for everyone else, instead of the first few people in line getting all of it at an artificially low price; and (2) induce other people to find ways to supply more, by  renting generators and rushing gas to the stricken area.

Obviously, I think this argument is persuasive, and even sufficient.

Suppose, though, that you aren't convinced.  And a lot of you aren't convinced (I'm thinking of YOU, Hutter!)  Let's do this your way.

More after the jump...


There isn't enough gas.  By a lot.  A terrible shortage. (Largely caused by the anti-gouging law, but put that aside for now).

That shortage must be solved by rationing access somehow.  The only ways to solve it are some combination of (1) price-rationing and (2) non-price-rationing.  (Okay, perhaps that was obvious, but I'm trying to be clear, here).

Now.  Non-price rationing typically involves queueing.  Waiting on line.  Standing around, wasting time.  First come, first served.  That is a COST.  How long will the line be?  That depends how high the price is.  For very high prices, lines will be minimal, because access to the scarce resource is rationed by price.  For zero prices, lines will be very long, because access to the scarce resource is being rationed solely by lining up. 

This is why resources in the former Soviet Union, and in Cuba and North Korea today, are rationed by standing in line.  The rule is that prices are grossly low, compared to the actual value of the resource, so lining up is the only way to ration access.

As far as I know, no one has argued that gas stations should cut their prices to zero, and use non-price-rationing only as a way of allocating available gasoline.  So, we all agree that some combination of price-rationing and non-price-rationing is called for.

If you oppose "price gouging," then you think that there is something magical, something mystical, about the price charged a week ago, when there were plenty of gas stations and people didn't really need gas because they didn't need to run generators and they could ride the subway.  For some reason, that price then, which was the result of VERY different circumstances in terms of both availibility from suppliers and value to users, is the "correct" price.

I have never understood that argument.  Let me just admit that.  There is nothing special about that price.  There are fewer places to buy gas now, and more people need gas, really really need it.

But okay, let's accept that there is something magic about the price last week.  So morally forceful, so beautifully calibtrated, that it should be maintained for all time.  Even THEN, "price" is going to rise to exactly the same level as if you allowed price gouging.

How, you ask?  The value of time.

The cost of getting gas is:

Price = $ cost of gas + $ value of time wasted in line

The price that clears the market under the new conditions is a fact.  It is just physics.  You can't change it.  Let's say, for the sake of argument, it's $25 per gallon.

What you can do, by using anti-gouging laws, is change the mix between  money paid to gas owners and money given up by wasting valuable time spent in line.  So if the price the owner can charge is $25 per gallon, there is no line.  If there is a price-gouging law, and the most the owner can charge is $4, then the amount of time wasted in line is $21, or more.  You hear stories of people waiting in line for 5 hours, for 6 hours.  Well, at $10 / hour, that's at least $50 wasted.  And it is wasted, it's gone forever, no one gets it.  Economists call that a dead weight loss.

So, even if I concede everything you want to argue, folks, the anti-gouging law is still dumb.  It still costs people as much, or more, to get gas.  They just pay in time instead of money.  And nobody gets the value of the time, it's wasted.  Do you really believe that those folks standing in line don't have better things to do?

Already, people are figuring this out, and secondary markets are developing.  People with a low value of time stand in line, and then resell the gas to folks with a high value of time.  The rich people still get the gas, because they value it the most.  It's just physics. 

The only difference is that you have decided, for reasons that escape me, that the gas station owner doesn't deserve to make any money.  He has no reason to stay open, because gas keeps.  He can sell gas next week for the same price he's getting now.  There's no reason to bring in trucks, because THAT owner is indifferent between selling it now and selling it later.  So there is also a shortage, making things much worse.  But even if we ignore the shortage, no one is saving any money.  The "cost" of gas is determined by scarcity, not by some law that fetishizes a price we happened to observe a week ago under different conditions.