Monday, November 12, 2012

Is Gas Rationing Superior to Raising Prices for Consumers?

With New Jersey about to end the odd-even gasoline rationing  imposed in the aftermath of Hurricane Sandy, we have an opportunity to consider whether this kind of response actually produces better outcomes than the price increases by which the market would normally balance supply and demand.  Most of the defenses of "price gouging" that I've seen, including Matthew Yglesias's recent posting in Slate, tend to focus mainly on its supply-side aspects. Yet such arguments, however well-reasoned, are unlikely to sway Americans from their innate sense of fairness, on which most anti-gouging regulations are premised.  That's inherent in the judgmental term itself.  However, having spent my share of time in gas lines during the energy crises of the 1970s, I believe that supporters of these rules are ignoring some even more pragmatic, consumer-based arguments for allowing prices to rise after a disaster.

In addition to the tragic loss of life and property inflicted by Sandy, the storm left the petroleum products infrastructure on which New Jersey depends paralyzed for days.  Refineries were shut down, distribution terminals full of gasoline were unable to deliver product, and gas stations without power had no way to sell the fuel stored in the tanks under their forecourts.  This combination represented a huge supply shock to the region, and it wasn't long before gas lines formed at those stations that had both product and electricity.  New Jersey has strict and specific anti-gouging rules and is already charging merchants with violations following Sandy.  Within a few days, in an effort to alleviate the queuing that resulted from the supply shortfall and the inability of retailers to raise prices, Governor Christie resorted to rationing by license plate number.

Although restricting prices might superficially appear more equitable--particularly for lower-income consumers--than allowing them to climb to the levels necessary to clear the market without long lines, it also imposes significant costs on all consumers.  For starters, anti-gouging rules effectively confine motorists to their vehicles precisely when they have many other urgent priorities, including attending to their families and homes. They also implicitly put a very low monetary value on consumers' time.  Waiting on line for four hours to obtain 10 gallons of gas at a pre-disaster price of $3.50/gal., instead of experiencing a much shorter wait to purchase fuel for $5.00/gal., is equivalent to being paid $3.75 per hour--around half the state's official minimum wage.  This situation also increases the chances that an individual will wait for hours only to see the station run out of fuel before his or her turn comes, because demand is unchanged or temporarily higher than before the crisis.  Adding odd/even rationing might reduce gas lines by limiting demand and breaking the psychology contributing to the lines, but it also compounds the harm to consumers, some of whom are left with no legal means of acquiring fuel when they need it most.

I don't expect politicians and regulators suddenly to embrace a purely market-based approach towards post-disaster pricing of necessities like fuel.  However, we ought to expect them to look at the real-world results of their policies and apply some common sense and creativity to improve how they function.  Anti-gouging rules clearly benefit some at the expense of others. How could we simultaneously preserve the benefits for the first group, while allowing those willing to pay a premium for emergency supplies to do so, in the process sending the appropriate price signal to reduce overall demand? One solution might be to allow gas stations with multiple pump islands to raise prices as long as they have at least one set of pumps offering the pre-disaster price.   Technology should provide even more innovative and effective options.

Given the magnitude of the supply disruption post-Sandy, there was no way to avoid a serious shortage of motor fuel in the affected region.  However, the appearance of long gas lines and the resort to a 1970's expedient of odd-even rationing shouldn't satisfy anyone concerning the effectiveness of the pre-existing emergency energy policies that were called into play following the storm.  I can't imagine New Jerseyans being content with the outcome they experienced.   


Jim Melendy said...

The odd-even discrimination should apply to odd and even hours, not days. It would have about the same effect on gas lines, roughly cutting them in half.

Ed Reid said...


In the cases in which lines were longer than 1 hour, the result would likely have been mass confusion.