Going nowhere fast
Gasoline "too cheap" sounds too good to be true, right? It is. I didn't get around last night to discussing this from Monday's New York Post (free registration required, I recommend bugmenot.com):
The police are unquestionably right to tell motorists to move along when they're blocking parking lots and street traffic. Mr. Guarino has the right to charge whatever he wants, and take any reduced profits he'd like, but his customers' practices are interfering with the neighboring businesses. Selling "more affordable" gasoline sounds noble enough, but in fact he's causing more harm than good.
The proper thing for him to do is raise his prices. He doesn't need to match his competitors, either: 15 cents higher will probably be enough to eliminate most the waiting customers. They won't go through the mess just to save that. His profits won't be hurt (quite the contrary in all probability), and meanwhile he'll be doing society a favor. His higher prices will encourage potential buyers to give up and go elsewhere, which will reduce their high search costs from trying to buy his artificially cheap gasoline.
I don't know how old Guarino is, but if he's old enough that he personally remembers the 1970s gasoline shortages (presumably what he meant by "energy crisis"), then he doesn't understand what caused them. What caused the lines then is the same as what causes them today: a price for a high-demand resource that's too low, i.e. lower than equilibrium. If there's a shortage, whether actual or just perceived, higher prices will temper demand, and they also force people to think rationally about whether they really need that resource more than others. These are principles I discussed in a fairly recent entry, The power of markets.
THE TOWN WHERE GAS IS TOO CHEAPApparently a lot of people consider it worth the time and wasted gas (idling and circling around the block) to save 30 cents per gallon. For me, the aggravation alone is too high a search cost. I also don't understand why some people risk getting tickets, especially with the prominent warning sign.
September 26, 2005 -- A New Jersey gas station with the lowest prices in the area is filling up with customers, while local business owners and cops are fuming over the long lines.
For the past two weeks, Glenn Guarino has been charging a pre-Hurricane Katrina level of $2.69 a gallon for unleaded regular at his tiny Ridge Road gas station in Lyndhurst — compared with his competitors' prices, which average just under $3.
The lines of honking motorists waiting for a fill-up are reminiscent of the gas lines of the 1970s. And local merchants are so fed up, they've complained to local cops, who wave away customers to keep the peace and to keep traffic moving.
Many are told either to waste gas by driving around the block — or keep moving and miss out on the savings.
"What am I going to do? I'm caught between a rock and a hard place," said Guarino.
"Prices are sky-high. The people are complaining about the traffic now, but what if there's another energy crisis and lines start running for blocks? What are they going to do then?"
Guarino claims that cops have been called five to six times a day by nearby store owners to break up the gridlock, which blocks parking spots.
"It's illegal. It interrupts the flow of traffic, and cars can't get in or out. It's hurting the other businesses," said an owner of a nearby store.
State law says that cars on the busy road are not allowed to idle or double-park, requiring cops to chase away would-be customers.
"I understand where they are coming from, but I don't think I'm doing anything wrong. I'm even taking a hit in profit," said Guarino.
But Lyndhurst police Capt. John Valente said, "If it becomes a hazard, we have to keep it moving, mostly to keep the spots open.
"A person's right to buy cheap gas doesn't give them the right to disrupt traffic." ...
The police are unquestionably right to tell motorists to move along when they're blocking parking lots and street traffic. Mr. Guarino has the right to charge whatever he wants, and take any reduced profits he'd like, but his customers' practices are interfering with the neighboring businesses. Selling "more affordable" gasoline sounds noble enough, but in fact he's causing more harm than good.
The proper thing for him to do is raise his prices. He doesn't need to match his competitors, either: 15 cents higher will probably be enough to eliminate most the waiting customers. They won't go through the mess just to save that. His profits won't be hurt (quite the contrary in all probability), and meanwhile he'll be doing society a favor. His higher prices will encourage potential buyers to give up and go elsewhere, which will reduce their high search costs from trying to buy his artificially cheap gasoline.
I don't know how old Guarino is, but if he's old enough that he personally remembers the 1970s gasoline shortages (presumably what he meant by "energy crisis"), then he doesn't understand what caused them. What caused the lines then is the same as what causes them today: a price for a high-demand resource that's too low, i.e. lower than equilibrium. If there's a shortage, whether actual or just perceived, higher prices will temper demand, and they also force people to think rationally about whether they really need that resource more than others. These are principles I discussed in a fairly recent entry, The power of markets.
posted by Perry Eidelbus at
12:28 AM
2 Comments:
So people are willing to wait in line for $2.69/gallon gas. Let's see - average non-supervisory wages are ballpark $16/hour + benefits, call it roughly $20/hour. Average gas tank, I don't know 15 gallons? Assume that "just under $3.00" means saving $0.30/gallon (could be even greater savings) That's $4.50 saved every time one goes to the "low-cost" pump. Which at $20/hour means that a solitary driver should be willing to wait no longer than 13.5 minutes for the equivalen opportunity cost of savings.
But, then we need to take into account the gas that is being wasted by having the car idling while one is waiting or by driving around (which reduces the savings by $0.60 cents assuming 20 miles/gallon at 20 miles per hour of driving for 13.5 minutes), the societal cost of increasing traffic creating delays for other drivers, the municipal opportunity cost of having to have police attend to the traffic instead of doing something more worthwhile, the opportunity cost of the other store owners' time in calling police instead of attending to their business, not to mention how far people are going out of their way to get to this gas station in the first place, which requires extra time and gasoline.
Yet there are those who would crown Guarino a hero for foregoing profit opportunity.
You got it exactly right. Of course how long you're willing to wait depends on how big your gas tank is, and your gas mileage also. An SUV owner would benefit more by waiting, though not as much since the SUV would burn more fuel as it idles.
There's so much harm here caused by people waiting in line. It reminds me of the Apple laptops recently sold for just $50, and people about ready to fight each for them. I guess they value their time and expended energies cheaply.
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