Saturday, November 03, 2012

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.


Gerardo said...

"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."


Via AP

"Gov. Cuomo says the Department of Defense will set up emergency mobile fuel stations at five locations around the New York City metro area.

Free gasoline will be distributed, with a 10-gallon per-person limit, Cuomo announced at a briefing today. Cars and emergency service vehicles will be able to fill up directly from the 5,000-gallon trucks.

8 million gallons of gas has been delivered in New York he said, and another 28 million gallons is on the way.

vlad said...

"I have never understood that argument." Well, read the comments on boingboing

The situation seems quite efficient actually: profiteering is bad, and waiting in line is bad - how are you going to make the trade off? Without the anti-gouging law it would be impossible to express your moral outrage at "profiteering" legally. With it, you have the option to buy from "profiteers" (who waited in line instead of you and sell it to you at high price) or wait in line yourself. How much you're willing to wait in line is the price you are willing to pay for expressing your anti-profiteering moral value. So the anti-gouging law creates the market for the anti-profiteering moral value.

Anonymous said...

I think a key difference between price and non-price rationing is allocation. With price rationing, the people who end up with gas are those with a low MU from $1 (relative to the value of 1 gallon of gas). With non-price rationing, the people who end up with gas are those with a low MU from 1 hour of waiting in line. The former, by and large, are wealthy; the latter, by and large, are poor (and wealthy willing to pay someone to stand in line for them, but then the line-standers get some rents). I'm speculating, but it seems that this is part of the underlying motive for the objection to price rationing.

Anonymous said...

Hello fellow Anon,

What in your comment wasn't addressed by professor Munger?

Pelsmin said...

Just returned from NYC/NJ and have a different question on the scarcity. I drove up from DC for a funeral, after calculating distance, hwy MPG, risk to my family of filling my SUV with 10 gallons of gas in jerry cans, etc. In the end, I was able to stop for gas all the way up the Turnpike. At the Joyce Kilmer stop, 40 pumps, 10 cars. At the next stop, 14 miles north in Edison, three mile backup onto the hwy to get gas. It was like that Thursday, Friday and Saturday. How could word not spread? How could social media not fix this? People were spending up to 6 hours in line.

JWO said...

Supporters of anti-gouging laws should be asked what they are doing to bring goods to the affected area. They should then ask themselves if they would put more effort in if it were very profitable.

Tom said...

Update on the "free gasoline" -- yes, it was announced, but NPR reports that at some distribution sites, the tanker trucks did not show up. (Wait in line for two hours, then NO GAS.) At other sits, there was violence; NPR's interviewee says it was like Lord of the Flies. Yes, very like that.

Tom said...

@Pelsmin How could the word not spread? Did you spread the word? HA! No profit in it. You'd only tell your friends and then they would have to gamble that conditions wouldn't change.

John D. said...

I had a similar experience as Pelsmin. Before the storm I filled 3 cars and a gas can "just in case." We live in Morris county and lines on post-Sandy Friday were 3-5 hours for cars. After my supply got a little low, but before I had to siphon a gas tank, we drove west to Phillipsburg NJ, waited 25 minutes, and filled our car tank and 3 gas cans, one of which was 12 gal. The 24 hour truck stops along the way had 20-40 minute waits also. I've waited much longer to get into a Harry Potter movie. Meanwhile back home lines decreased to "only" 2 hours on Saturday. Today we are almost back to normal as power is slowly getting restored. I'm with Prof Mike on floating prices. Not only would freely moving prices bring in more supply, it might have encouraged folks to try a little geographic arbitrage for their benefit. I suppose some folks would rather complain than look for a better way. I'll be sending a note with the link to the price gouging podcast to Gov. Christie. On a side note, I thought the odd-even ration scheme would accomplish little if anything. It does not reduce the number of cars needing gas, it only determines which day they can purchase. So I don't see how the lines get any shorter unless everyone were topping up every day. I'm interested to know if I am missing the point with this scheme. On a side note to the side note, getting fuel here is trivial when compared to the devastation along the Jersey Shore and parts of Long Island. My prayers go out for those people.

Unknown said...

You give a very convincing argument here. Price and non-price rationing can also solves the inhumane problem of disaster profiteering. Maybe officials should study the benefits of your schema here, in an event a disaster strkes again, resulting in another energy crisis. Kenny @