On Saturday afternoon, September 20, my daughter, who lives in Nashville, called my wife, who was visiting in Atlanta. She knew that my wife had planned to return to the Memphis area by way of Nashville. She told my wife to be sure to fill up her gas tank in Atlanta, because there was a major gasoline shortage in Nashville.
My wife went out to fill her gas tank, and she found that she could not find a gas station with gas for sale. She called me to warn me. I immediately went to the local gas station. They had no premium gas, but they did have unleaded regular. I filled up my tank.
I came home and did a search on the web, and I found a story about the shortage in Nashville. The story said that a rumor of an imminent shortage had swept Nashville, and people lined up their cars to fill up their tanks. My daughter said that she had been in a long line herself. She was able to fill her gas tank, but shortly thereafter, the gasoline station manager placed “empty” signs on the pumps.
Here we have a classic example of rationing by lining up. A week before, there had been a regional gasoline shortage as a result of fears regarding Hurricane Ike and the possibility that gasoline refineries in Texas would be shut down for months. Some gas stations raised prices, but others refused. The ones that refused ran out of gas. People sat in their cars for half an hour or longer in the hope of getting to a pump, and filled up their tanks.
Before the weekend was over, President Bush went on national television and warned against gasoline stations that gouged consumers. He said that there would be an investigation regarding accusations of gasoline stations that raised prices on Friday.
The message got through this weekend. Instead of raising prices, in an attempt to reduce demand for gasoline, thereby allocating gasoline that was in short supply by means of price, station managers simply let people fill up their tanks until the pumps were empty. Anyone who wanted gasoline after that was out of luck.
This is rationing by lining up. It is the alternative to rationing by price. Rationing by lining up creates no financial incentive for suppliers of the item in short supply to allocate new supplies to the region of the country which is experiencing a shortage. Instead, delivery schedules remain the same as they did prior to the shortage. This continues the shortage.
Whenever there are complaints about price gouging during a period of a shortage, sellers get the message. The next time there is a shortage, they hesitate to raise prices. They shift to the other allocation system: first come, first served. This subsidizes people who have a low value on their time. People who place a high value on their time prefer to pay extra money in order to attain their goals. But this is made illegal by the state. So, the shortage lasts longer than it would otherwise have lasted.
The official goal of the government is to make certain that everyone has access to the item in short supply. The government says that raising prices during a shortage is unfair. So, the result is the opposite of what the government’s official justification was for holding prices down. There is an even greater shortage, because people buy more of the item than they need immediately. They have no incentive to reduce their consumption, thereby making available applies to those who were at the end of the line. There is no incentive for anyone at the front of the line to refrain from filling his gasoline tank. So, gasoline runs out before the line runs out.
This happens with regularity. All it takes is a rumor to create massive demand for the item that is believed to be in short supply. There is no pricing arrangement that alerts people to the crisis. Instead, long lines appear in the front of gasoline stations. As soon as the long lines appear, people panic, and line up to get gasoline even though they do not have empty tanks. This is exactly what I did as soon as I heard about the shortage. I had half a tank, but I went to my local gasoline station and filled up. I found that there was no premium gasoline available. That was not a problem, since I use unleaded regular. But I did note that there was a shortage of premium, and this encouraged me to fill up my tank.
The public refuses to learn. The public is incensed against people who raise prices in a crisis, that is, people who respond to increasing demand by large numbers of buyers. The critics do not like the principle of the auction: high bid wins. The critics prefer another principle: first come, first served. The second principle offers no incentives for suppliers to increase production.
Once again, we learn that the free-market principles of open competition and high bid wins cannot be thwarted without negative repercussions.
September 22, 2008
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