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Wednesday, January 28, 2009

An economic mystery c. 1909

An interesting question is asked in the January 28, 1909 NYT:

Below I give bills for five years at 131 East Forty-third Street, which can be verified by the company's books at 4 Irving Place, city:


What gas "magician" can tell the public how the company does the trick? The price of gas does not concern the public - it is the bills renders - and foregoing table shows my bills were smaller by over $9 in 1902, with gas at $1.10, than in 1907, with gas at 80 cents. Who can solve the mystery?

To the non-economist this might seem perplexing, but my answer to the mystery was that the individual's demand for gas was (slightly) elastic. Thus, when the price of gas fell they consumed more gas so that they actually spent more than before.

Another interesting fact was that the price of gas had been regulated to be $0.80 per unit and this, in turn, actually increased revenues for the gas company. As we don't know the costs of the gas companies, we don't know if their profits increased. However, I would assume that profits fell because otherwise the price of gas would have been $0.80 without the need for regulation.


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