Frankenstorm and Price Controls

I ran across this post at the Institute for Energy Research about the price controls placed on New York and New Jersey gasoline markets. Hurricane Sandy both decreased the supply of gasoline to the markets and increased the demand. So naturally, the price would rise under an unhampered pricing system. This is a classic Principles of Economics problem.

However, government-imposed price controls have left gas shortages, long lines, and rationing. Sounds familiar, right? (Think Nixon and the 1970’s)

The most interesting part of this post was his explanation of the expectation of future price controls on gasoline markets today. Even if state governments don’t impose price controls, the mere expectation of those controls will lead gas suppliers to not stockpile a lot of gas for a potentially severe future supply shock, adversely affecting the consumers when the supply shock comes.

Some critics have objected to the above type of analysis, claiming that in the immediate aftermath of the hurricane, the transportation infrastructure (such as bridges and ports) was so severely damaged that the local gasoline supplies were effectively fixed. Thus, these critics say, the price controls served a useful social purpose, in preventing a few gasoline retailers from getting rich at the expense of their unfortunate neighbors.

Yet this is a very shortsighted analysis, and fails to appreciate the versatility of a truly free market. Suppose for the sake of argument that Hurricane Sandy completely isolated New York City from the outside world for a few days. Even so, theexpectation of anti-gouging rules made the New York residents worse off.

Think of it this way: Meteorologists had given several days’ warning that the “Frankenstorm” was going to be a big one. Residents were stocking up on flashlights, batteries, bottled water, and so forth “just in case.” If we actually enjoyed economic liberty in this country, then the gasoline retailers in the area would have thought, “Hmm, if this storm is as bad as they’re saying, we might be cut off for a few days, and the subways might be flooded. The market in that scenario might bear a price of $7/gallon or even higher. So it makes sense for me to carry a much bigger inventory than I normally do. If the storm is a dud, then I’ll be out a bit of interest I could have earned on my capital, while it’s tied up in the massive inventory that I have to gradually unwind. But if the price does happen to skyrocket, I’ll make a killing.”

Thus, even the amount of gasoline on hand when Hurricane Sandy struck, was itself lower because people in the industry knew full well that the knee-jerk government response is to crack down on “gouging” in such situations. There was not as much incentive to build up large stockpiles in the week before the hurricane hit, as there would have been had retailers believed they actually owned their property and could charge their customers what they wanted for it.



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