Wednesday, November 19, 2008

Spreading the wealth - conservative style

Most of us have at least a basic understanding of supply and demand: The more people that want something, the more it costs - and the less there is of that something, the more it costs.

The most visible example of this behavior is gas prices. In the summer, people tend to travel more which in turn pushes the price up. Similarly, when weather or world events disrupts the oils supply, prices go up.

Let's look at a few scenarios to illustrate free market principles in action:

First situation: A hurricane threatens (or has already hit) a coastal city prompting evacuation. The station owners respond by raising gas prices to $8/gal.

Since it would cost $120 to fill a 15 gallon tank, motorists have to make choices. Many who have 3/4 of a tank already will decide to press on and fill up in another town - or decide they have enough to get where they are going. People with empty tanks will put in just enough to get where they need to go.

Today, however, many states have past laws against price gouging in times of crisis. Suppose instead of $8/gal gas, station owners are forced by law to keep their prices at their current $2/gal. In this case there is no incentive for drivers to ration gas. Everybody tops off their 3/4 full tanks. Everyone fills their tank completely no matter how far they need to go and the situation becomes first come first serve - and the station is pumped dry much more quickly. Worse yet, the station owner who has no idea when he will be able to be refilled himself - or at what price, decides to close up shop rather than selling fuel at a loss.

As tough as it is, I think most people would prefer $8 gas to no gas at all. What is more fair? The "greedy" station owner selling small amounts of gas to as many people as possible or selling at a "fair" price and only the fastest group of people make it out in time?

To be continued...

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