Monday, December 24, 2012

Gasoline Shortage

There is a worry that gasoline will run out.

Households run to the gas station and begin to hoard.

There is a price ceiling on gasoline, a bit above the previous equilibrium price.   The market price rises to the ceiling and shortages develop.

The fears have been realized.   It really is difficult to find gasoline.   Whenever any appears, everyone tops off their tanks and fills up gas cans.

If the ceiling were removed, the shortages would disappear.   We can imagine the price rising above the ceiling to clear the market.   But then, once everyone knows that they can get gas when they want it, the hoarding dissipates, and the market price falls back to its initial level--below the ceiling.

Suppose some people never believe that gasoline was running out.  Suppose some people knew that the shortages were caused by the ceiling.

But there were many people who believed the crazy rumours and never paid attention in economic class.   It is all a bunch of graphs and numbers.

Just because someone knows that the reason for the shortages is a phantom and price controls doesn't mean that they do not benefit from hoarding gasoline too.   They don't want to run out.

But these clever people know that if the ceiling is removed, the price of gas might rise for a time, but it will soon fall.   If there are enough, perhaps they just stop joining the lines.   Once they quit hoarding, there is no shortage at the ceiling price, and it beings to fall.   The less clever people also notice that there is no shortage too and also that the price is falling.  They quit hoarding as well.

Allowing the price to rise above the ceiling results in an immediately fall.

If no one believed that gas was going to run out, and believed that no one else believed that gas was going to run out, there would be no hoarding.  The ceiling wouldn't matter.

If no one believed that gas was going to run out, but believed that everyone else believed that gas was going to run out, there would be hoarding.   The ceiling would create a shortage.   If we could just convince everyone that there was nothing to fear but fear itself, the problem would be solved.  Or, if the price was allowed to adjust, the shortage would go away, and the prices would soon fall again.

If everyone believed that gas was going to run out and believed that everyone believed it too, then the hoarding occurs, prices rise, the ceiling is binding, and everyone sees that gasoline really is running out.   Get rid of the ceiling, and their eyes will be opened. 

If some people believe that gas is not going to run out and that the problem is the ceiling, but others do not, then it is possible that ending the ceiling will result in the shortages ending and prices falling.

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