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Friday, June 15, 2007

Beware those who promise low prices

At least prices far below market clearing prices - the result is invariable a shortage. Whether the government reduces prices through fiat or a firm reduces prices for a gimmick, the result is that the quantity demanded almost always out-paces the quantity supplied (at a given time and location).

This lesson was clearly illustrated in this Southwest Farm Press article:
Yogi Berra might have described the scene as deja vu all over again—cars lined up for half a block or more, two abreast, waiting to reach the gas pumps. Anyone old enough recalled the long lines of frustrated drivers back in the 1970s, when an Arab oil embargo created shortages and sent gasoline prices higher than anyone imagined they could go.

This line developed not from a shortfall but from a recent ethanol promotion, sponsored by Kroger, General Motors, the Ethanol Promotion and Information Council, and Texas Corn Producers. Folks gladly waited in line for a 50 cents per gallon savings on gasoline at the Denton, Texas, Kroger fuel station.
The lower price was a gimmick and it worked. Gimmicks are one thing, but national/state policies are yet another. Beware those who promise that they can reduce the price of gasoline - they are likely to induce artificial shortages.

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