How To Create A Shortage
Hawaii's attempt to place a price control on the wholesale price of gas will lead shortages. Politicians believe that retailers will pass the savings on to the consumer. Yet, the whole program is based upon a fallacy of economics, one that has haunted economics for centuries and even though economists have debunked this fallacy for more than 130 years, it still lives on. The fallacy is this: the price of a final (consumer) good is determined by its cost of production. FULL ARTICLE
Comments (15)
One would think that the legislature in Hawaii who proposes a maximum price, would think by himself “hey, hasn’t there been examples in history where governments have imposed a maximum price on a commodity, and what was the result?�. It’s unbelievable how some people can stay ignorant of simple economic truths, it really makes you want to throw copy’s of Power & Market at there heads.
Published: August 29, 2005 10:55 AM
I ask once again; Is there anyway to make money off Hawaii's self-immolation, perhaps by purchasing futures or what not of energy stocks in Hawaii?
Would it be unethical to take advantage of the harmful situation a government creates for itself?
Published: August 29, 2005 11:03 AM
Iceberg,
Open a gas station in Hawaii. With your buying price for gas capped but your selling price uncapped, then you (as a service station owner) are in a situation where you can buy low and sell high. If the price cap is effective, i.e. below the market price, the supply of gas from the wholesalers will be reduced causing the selling price from the retailers to rise. How about that for a money making tip?
Published: August 29, 2005 11:28 AM
This is the age old politician’s way of using someone else’s money to make himself look good and win favor with voters. It’s got nothing at all to do with economics, real or imagined.
Published: August 29, 2005 11:39 AM
The only amazing aspect of this forthcoming fuel debacle in Hawaii, is that politicians can actually ignore the basic fundamental facts of economics, then believe than they can improve a situation based on that ignorance. Perhaps the only good side of this forthcoming debacle is that the operation of electric cars may become more attractive to Hawaiians. Then they'll have a used battery disposal problem on their hands.
Harry Valentine
Published: August 29, 2005 12:12 PM
DEar Sir:
Your analysis is relevant.One element is left out of the interventionist equation .The oil market is further distorted ,on the producer side, by state intervention in the name of national security and on the consumer side by hefty taxes ranging from 10% to 80% of the selling price for the survival of the state.
Published: August 29, 2005 1:10 PM
What I found interesting is that the caps are imposed on wholesale prices rather than on retail prices. Why? This one has me stumped. Of course, it could be that the retailers lobbied for this particular law. Does anyone know the particular history of the law?
Published: August 29, 2005 1:59 PM
I would suspect that the Watermelons are in support of this legislation.
But also an interesting point was the placing of 'market' mechanisms into the system. Now if they were actually free market mechanisms they would not have to been put in place by legislation. They would naturally arise in the market from the market participants. But then it is an old trick. Call a thing what it certainly is not. The lies are never ending.
Published: August 29, 2005 4:37 PM
HOw does it work freezing prices for the producer? That guarantees a shortage. If the producer can not sell at a high enough price then they simply won't sell. Or they will sell only that small amount they have where they make as much profit as at the higher price.
I think this was done with some knowledge of economics. If you cap something at the producer level then you can always blame the retailers for the shortage.
Published: August 29, 2005 4:43 PM
And by calling attention to the 'market' elements of their stupid plan, after their plan fails they can claim that its failure was caused by laissez-faire and that the only solution is to make sure it's even more statist next time. Typical.
Published: August 29, 2005 4:45 PM
Small point having nothing to do with economics. "Hawaiian" is used to denote an ethnic origin. I suggest replacing it with the usual phrase "Hawaii residents".
Longtime (former) resident of Oahu,
Published: August 29, 2005 4:59 PM
Here we go:
http://www.hawaii.edu/offices/eaur/styleguide.html
Published: August 29, 2005 5:03 PM
Retailers will raise the price so as to insure they can meet supply. Use kickbacks to wholesalers to get more from wholesalers. So, we have high prices that can be blamed on having to bribe the evil wholesalers for oil. This way, the government of Hawaii avoids the blame for stupid policy, the legislators get to look like their trying and the local retailers get to deflect some of their responsibility for high prices. The big, bad oil companies forced the retailers to bribe them which they had to get 'help' from consumers to pay and may even provide them a way to lobby for subsidies from the Hawaii government.
Published: August 29, 2005 6:22 PM
This is a good example to illustrate why price caps produce shortages. When crude oil is refined, the refiner can control the proportion of distillate products produced. Thus, in winter, when people use more heating oil and drive less, the refiner adjusts the distillation process to produce more heating oil and less gasoline – gasoline tends to be cheaper in the winter, particularly if it is very cold. During the summer, the reverse is true – the process is adjusted to produce less heating oil and more gasoline to cater to the decreased demand for heating oil and the increased demand for gasoline. Thus gas tends to be more expensive in the summer. (Incidentally, Labor Day is fast approaching and I have yet to hear the moronic braying about price gouging that usually emanates from the Senate around this time of the year!)
So what is the refiner likely to do in response to wholesale price caps on gasoline? Produce more of the other products such as jet fuel etc, where there is still a demand at the market clearing price, and less gasoline, where the price has been arbitrarily capped. In the extreme circumstance where the capped price is below the cost of production, the refining process will be adjusted to produce the minimum proportion of gasoline, and if this produces an over supply of the other products, the amount of crude oil refined will be reduced, further decreasing the supply of gasoline.
Published: August 29, 2005 6:48 PM
Anderson has written one excellent article. It is wide ranging and has depth as well.
I liked how he described the fallancy of composition theorem without actually going into greatly detailed description of same.
His description of demand/supply inregards to gasoline was also very good.
His history concerning past failures of price control contributed to the depth of the article.
One very good read.
Respects,
Joseph Zack
Published: September 2, 2005 10:51 PM