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Friday, September 15, 2006

Why gas prices differ so much?

I have a buddy in Atlanta who complained that the price of gasoline was considerably lower on I-85 in South Carolina than on I-85 in metro Atlanta even though Georgia has one of the lowest state gas taxes in the country. He wanted to know what was up - the standard position of the economist is that price differences are the product of a) differences in cost and/or b) differences in demand.

The demand for gasoline along I-85 in north Metro Atlanta is likely the same as the demand for gasoline along I-85 over the border. Any demand differences would be unlikely to explain the fifteen cents (or so) difference he was observing.

More likely it was a cost difference. Perhaps there are different costs in transporting gasoline to Atlanta than to up-state South Carolina. Perhaps there are different costs in how the gasoline is stored and delivered? Oh yeah, there might be different types of gasoline being used in Atlanta vs. South Carolina.

Here is a map of different variations of gasoline around the country. Notice that South Carolina can use conventional gas whereas Metro Atlanta cannot - even though Georgia's state gas tax is lower than SC, this can help explain the differences in prices my buddy was observing.

What remains to be answered is whether the different formulations of gasoline are increasing social welfare. On the margin, the marginal benefits in the form of clean air, etc., of the specific formulation used in Atlanta, versus, say, Oklahoma City, should equal the marginal costs.

Rents for land are much higher in metro Atlanta that in upstate South Carolina. My guess is that the rental cost of the service stations are a major contributor to the price differential.
- Buttimer
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