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Sunday, October 12, 2008

How NOT to handle a gas shortage

The gasoline shortage in the Charlotte area is finally coming to an end, although some independent gas stations still have shortages in one or two grades of gasoline.

After Hurricane Ike, and we knew there would be gasoline shortages in the area, the governor immediately was on the radio and television encouraing those who thought they were being "price gouged" to take a picture and send it to the governor. The result? Gasoline prices were not able to raise and therefore there was less incentive for out-of-state gasoline suppliers to move gas to the area, individuals were not encouraged to use price as a rationing tool in the market and the shortage persisted longer than it otherwise would have.

Two local gasoline stations took very different ways of dealing with the problem. The first limited gasoline purchases to $40, but held gasoline prices lower, and that station was out of gasoline very quickly.





The Exxon next door asked for voluntary quotas but raised the price of gasoline:





Rather than having maximum purchase amounts, I would have recommended a minimum purchase of, say, 12 gallons and a maximum purchase of, say, 30 gallons. The minimum purchase would have reduced the incentive for individuals to "top off" whenever they could find gasoline, which in turn contributed to longer lines.

In the gasoline (mini) crisis, as with the larger credit/financial crisis, government intervention in the market - when it is operating well and when it is not operating well - tends to make problems worse before they make the problems better. This is not necessarily because of ineptitutde on the part of policy makers but because no policy maker can have complete information and this leads to unintended consequences.

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