By Eric Crampton*
The stylized facts.
First, lots of petrol stations are closed for lack of power. Second, there is a temporary gap in supply such that if folks only filled up normally, all would be fine.
But, if everyone is filling up all the time, the stations cannot handle the spike in demand combined with the temporary supply shock. And given that everybody else is behaving badly, it is optimal for each player in the game also to behave badly.
If everyone expects that everyone else is panic buying, then everyone will rightly expect queueing and empty stations when they go to fill up. Moral suasion has been tried and has failed to break the bad equilibrium.
The very best way of solving this problem is a temporary price hike. Figure out when normal supplies will be restored. Announce that prices double until that day, at which point they drop by a quarter per day till back to normal.
The usual case for price gouging is it helps draw resources to the area. There is no margin for that here. They're already doing all they can.
Instead, the point is purely allocation. Both to current users and over time. We want to make sure that the guy with a half a tank decides to wait instead of filling up. If he knows prices will be cheaper in two days, he will hold off.
And, even better, folks will also decide to cut back on discretionary driving when construction and emergency vehicles need the roads.
Some folks worry about these poor not affording gas. The gains of reduced queueing and reduced congestion massively outweigh equity considerations of this sort. Or, think of it this way.
In a crazy emergency like this, are more people screwed by having to queue for hours for gas, or are more screwed by having to pay an extra twenty bucks for enough fuel to see them through the day?
Double petrol prices. Do it now.
So folks don't hate the petrol stations, call it a two dollar per litre earthquake surcharge with proceeds going to earthquake relief.
(Updated with final paragraph)
* Eric Crampton is a senior economics lecturer at Canterbury University. He regularly comments in his Offsetting Behavour blog, but has been unable to post because of the earthquake. He sent this comment from his mobile phone and his Twitter profile.
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67 Comments
Sorry but it won’t work. You’re trying to short circuit an irrational train of thought with another irrational action. The Law of unintended consequences says that raising prices will lead to more hoarding...not less. In fact, a black market will spring up overnight. And then you will be battling irrationality on two fronts instead of one.
OK Troy, you need to back up what you are saying with some decent logic.
Do you realise you are saying that a temporary increase in price of petorl will cause people to go out and buy expensive petrol to hoard, presumably until prices fall? You are also saying that a black market would form that would sell petrol CHEAPER than the legal price.
Neither of these things would happen.
The law of unintended consequences doesnt mean that results will always be the opposite of what you intend with your actions.
Kimble,
The black market will be those that were hording it prior to the price raise and reselling it. If you don’t believe me I will advise you to read about just such markets developing during the early 80’s in the Soviet Union.
And I can assure you the Law of Unintended Consequences includes both the opposite of what was intended and even exacerbate the problem you were trying to solve. You’re asking irrational actors to suddenly act rationally. That is extremely difficult to do. In fact only time solves this type of problem.
So Troy, your problem with the "black market" is that more fuel becomes available? Isnt that the INTENDED CONSEQUENCE of the price increase?
And you are changing your story. You said the price increase would lead to hoarding. But now you are saying that the price increase would reduce hoarding. Which is it?
I think you're confused so let me draw you a map...Immediate artificial price increases will lead to immediate mass hording -> supply disruption-> which will lead to organized crime -> black market activity -> more hoarding -> more crime -> more black market activity...etc. No government in history has successfully legislated away panic. If your panicking, short of invasion, government action is not the first place you should look too for immediate relief .
Your position is not complex enough to cause confusion. Dont flatter yourself.
An immediate price increase would only increase hoarding if people thought the price was going to increase more in the future. As the price increase is due to something observable, the earthquake, almost nobody will expect a further substantial price increase, so no hoarding is likely to take place. There is no supply disruption.
If the increase is announced there will be little to no panic. Few people will expect the price to remain this high after the emergency. Current demand will fall as people put off their fuel purchases until the emergency is over or they absolutely have to buy fuel.
The price in a black market is HIGHER than the ordinary market price. A price INCREASE does not lead to a black market. Why would someone supply fuel secretly on the side at a lower price than they can get elsewhere?
WOW!! you just ate you own logic. Your saying that NOBODY will expect prices to continue to increase...if that was the case then there wouldn't be hoarding going on right now to create the very problem you aim to defuse. You can't control panic with price interactions. Period. You can ether stop the sale of the product or wait till the crisis abates.
Unless you are suggesting the Mongrel Mob have access to crude oil and the ability to refine it, your prediction of a black market is ridiculous.
If you're suggesting that the black market will exist (presumably from a well organised group of siphoners) because of the price increase, you have to answer the question of why they don't already exist due to the increase total cost (including queueing) of petrol already.
The answer is there is no reason. New Zealanders know that the only oil supply is the oligopoly we have, and a price increase with a promise of lower prices in the future will guarantee that only people who absolutely value oil (rather than panic hoarding) will pay for it.
Every person with a sense of responsibility is looking into solutions right now. In doing so - it demonstrates how difficult it often becomes to find the right answers. Is it because we moved away to work in harmony with nature - with the laws of nature ?
Anyway - I think people currently not living/ working in Christchurch and experiencing daily life - I for myself don't comment anymore - what do I know - nothing !
Be strong !
"Double petrol prices. Do it now."
This is absolutely extraordinary. Do you not think that if the price of petrol is doubled in Chch that theft and damage of motor vehicles & petrol wouldn't spike? There are lots of abandoned cars in the streets here, and at homes that people have abandoned. We've already seen that there are looters and others more than happy to take advantage of the misery of others. How many more would be inclined to start siphoning petrol in the middle of the night?
So the incidence of people stealing cars worth multiple thousands of dollars would massively increase because the fuel in the tank is worth maybe $100 more? Are you serious?
Are there really legions of otherwise law abiding people who would turn to crime due to an extra $100?
Siphoning risk might increase a little bit, but a fuel shortage in the area would do the same thing, no?
they tried to make the same argument in California when they first started issuing large tax increases on cigarettes...guess what cigarettes are a major source of income for the organized crime. So yeah it happens just like that. Never underestimate the resourcefulness of a criminal. You want to know another major income source for organized crime...scratch off lotto tickets!!!
Eric, there are enough worries for people trying to leave town as it is due to no housing, no water, no power, friends and family dead. Then you come along and submit a knob-like artlcle like this dribble, to encourage petrol stations to price people out of leaving the city due to lack of affordable fuel. Not everyone's on a UC wage, and I'm suprised by these comments they give you that.
I saw a dairy selling milk for $7 for 2 litres. He must have attended one of your lectures. I'll never shop there ever again, and will encourage others to do the same.
All that happens is that people go out to out lying areas and consume all that fuel, as well as hit the supermarkets. Saw it happen in Leeston yesterday!
Sex and travel Eric!!!!
Engage your brain dude.
What would happen if the price of petrol was DECREASED to 1 cent a litre?
Obviously people would go out and buy it. If they knew the price was going to rise in the future, why wouldnt they buy it now? Most people buying petrol might not even need it. The people who do really need it badly might miss out.
Now think about the opposite. People who dont need petrol wont buy it. There will be more available for those who really do. Their petrol cost would increase, but at least they could GET petrol. Would you prefer that petrol stayed cheap and people who need the petrol most have a greater chance of not getting it?
How is this not obvious? This is simply what Eric was saying. Did you actually read the article? You obviously didnt understand it.
There is already is a supply and demand mechanism occuring when these events happen. You can either choose to stay home and wait for the lines (and possibily the supply to disappear), or you can choose to join the line and trade-off your time. Obviously the majority of people have choosen the first, as the entire Chch population isn't lined up at the local BP station. I suspect you get quite excited about extreame S&D situations.
There are clearly people who need the fuel now, some believe they'll need it soon (maybe before it's too late). That's their choice, and who are you to moralize by dividing people in groups who either can't pay the increased tax, and people with deep pockets or who are price insensitive.
Where do you draw this line. Tax bottled water, baked beans....... how about hospital beds, they're in demand also. Imagine the doctors saying that if you don't pay the $1000 surcharge, you'll have to attend to that broken leg yourself, off the site thanks very muchly.
And what political party would put their name to this anyway. The crazy Greens might, until they get burnt out of the caves that they exist in.
It seems to me that the economics taught by the likes of Eric has caused the worldwide financial meltdown. His idea about interfering with fuel prices will seem totally idiotic to anyone with an ounce of intelligence. The queues at petrol stations will be gone in the next few days. All that is required is a little bit of patience.
No YOU are suggesting a nationide gas tax. Why would a nationwide increase be needed?
So all your objection comes down to is that you dont want anyone to make more money than you think they should. You would prefer people missed out or at least had to work much harder to get fuel, than have your own sense of what is right be challenged.
To hell with other people, right? You prefer to feel good about yourself.
Kimble, if the price of petrol was reduced to 1cent per litre I wouldn't even leave my house. i have a full tank of petrol in my car (sorry, but my petrol light was on and I figured that the rational response was to buy petrol. Believe it or not I drove straight in to the station without having to wait, and filled up.) and don't have capacity to take more.
Will people steal more petrol and perhaps even vehicles if the price of petrol goes up? We might get to find out without having to speculate. You're right though, I don't expect generally law-abiding people would do so, even when under extreme stress like they are now, but I think some will.
I think you're correct that a fuel shortage would also increase the incidence of siphoning. That's why we just need a steady supply of reasonably priced petrol
We seem to have upset you with our comments. Sorry, but some of us are under a bit of stress at the moment.
Joseph K, who cares whether you would go get petrol? What has that got to do with anything? Were you making some grand point that I have missed?
I am not upset. I dont think it is right that this lot accuses Eric of being stupid, saying that his stupidity caused the GFC and that he shouldnt be working in academia, all for saying something they dont understand.
Well I agree with you that other posters shouldn't be playing the man. I don't condone that and good for you for pointing it out in your own special way.
You made the claim that if the price of petrol was decreased to 1 cent then "Obviously people would go out and buy it"
I refuted your claim by stating very clearly that I would not do so at the current time. Yes, under normal conditions I would, and so would other rational actors I think, but not at the moment under extraordinary conditions.
So all I've done is disagree with you by offering a counter argument. I have not made "some grand point" (in which case rest assured that you could not have missed it).
I'm not going to play anymore if you're going to get all aggressive :-) Feel free to have the last word.
It is not refuting my point that "people would go out to buy petrol if the price was 1 cent per litre" by showing that not ALL people will go out and buy petrol.
Just like someone else couldnt refute your point that people are good, by showing that a single person is in fact bad.
Doubling the price of petrol in Chch would send out an immediate message that fuel is in short supply and you better go out and buy what's left now, at any price.
Truth is in 24 hrs everyone will have filled their tank and found out they don't really need it. Sudden dip in demand and all is well.
If you combat panic with panic you make more problems, and unintended consequences. 1st thing is stop, take a deep breath, and look at the bigger picture.
Double the price of petrol, temporarily, would see people stampeding to the Shell station, as 'temporary', in political talk, is deemd to be "for as long as we can get away with it!". Kind of like the temporary Maori seats that were put in, what 90 years ago? Economic and politics. Now there's a good couple of sciences.....
Seriously? Think about what you're saying! You're suggesting that Shell might double the price of petrol in Canterbury for 2 days, then just laugh maniacally and keep it double the price for eternity and pocket the profit forever, all the while presumably keeping a harem of child prostitutes and a well organised group of urchin pickpockets.
Think about it! Petrol companies could double the prices everywhere (RIGHT NOW) if they thought it would increase profits. The thing holding them back is competition. There is no chance that petrol will cost 2x its regular price in Chch until the end of time.
Perhaps it might be better if you thought about 'who' would be doubling the price of petrol? It wouldn't be Shell, would it?! And I venture to say that if the 'doubling power 'decided that 'yes; that worked" and needed the extra revenue to re-build with, they would indeed keep the price of pertol 'doubled' for eternity.
Yes, just as halving the price of petrol would arguably make some/many/perhaps even most rush to fill up (but not me, remember, my tank is already full ;-)
By changing the price of petrol suddenly and to any significant degree, you panic people. Perhaps its best just to keep the price the same and tell people (truthfully or not ;-) that there is plenty of petrol to be had and that the supply is secure.
How many people who think that a massive increase in the price of petrol, to multiples of what it is now, a price change that is unprecedented in the last few decades, is a permanent change?
How many of THOSE people would not have heard the news that it is a temporary increase due to the earthquake?
I think the first group is small, and the second group is so small it isnt worth worrying about.
the reality of the petrol/oil scenario is this:
Libya is the only country that supplies high grade oil to france, spain, portugal etc.
it in fact produces 70% of the worlds high grade oil.
for kuwait,iran etc to stay they'll up production is superfluous as the above countires and more don't even have the refineries to convert crude oil.
hence the supply issue and soaring prices....get used to it as $ 5 a litre is not out of the bounds in the future....which,of course, will affect real estate prices for housing on the outer suburbs like rodney in auckland..
but then wait until the revolution as we've seen sweeping north africa hits france...troubled times are ahead.
just like the sept 4th e/quake in ChCh was only a precursor to the big one.. so has the last 2 years since the global financial crash only been a dummy run for the historical changes that are coming.
Look at the make up of a litre of petrol in NZ:
To keep the country moving - the government will reduce its take.
It's likely the point at which capital, land, inheritance (and other accumulated wealth) taxes will be introduced to counter.
Do you want to be the one to tell people who desperately need petrol that they cant have it because someone else who doesnt need it as much was simply further forward in the line than they were?
If your life is in tatters and you desperately need to travel, the price of petrol isnt as big a deal as not getting any petrol at all.
If you think that you can somehow assuage the collective conciseness of the masses with government intervention I know a few former Arab dictators that would love to have you number on speed dial. The bottom-line is your being myopic and naive. You shouldn't feel so overwhelmed by micro economic vicissitudes. If your this passionate about it then take action. Go to Christchurch and pass out 5 liter buckets of petrol, or go volunteer, or do what I did and offer free room and board to a displaced family. But do yourself a favor and stop arguing with everyone with a dissenting opinion on this blog.
Suppose you really needed a new fridge. You went out to buy one today, and the guy told you that there'd be a sale on in two days: half price for the exact model you wanted. Only the folks who really really really wanted the fridge today would buy it, right? Other folks would wait 'till the sale.
That's what a temporary price hike does if you have a preannounced date when the price will come back down. A temporary cut in demand to give them time to get the gas stations online again, followed by a move towards normal.
Here are the two problems as I understand you see it:
Everyone is filling up all the time, the stations cannot handle the spike in demand
Demand is high as end users are hoarding (we assume?)
combined with the temporary supply shock
Supply is low due to disruption of the supply chain.
Why not stipulate the amount able to be purchased on any visit to say $40.00? All the pumps are preset (no time needed to make a selection) - attendents take the money on the forecourt (preferably cash, or if available wireless eftpos) -
The transaction times speed up considerably thereby reducing queues and congestion.
People might travel from one station to another to fill up, but that would be counterproductive, particularly if you thought there would be ample available at the nearest station tomorrow if need be. And those wishing to travel lnger distances can do the multiple fill ups on their way along the route out of town.
I have no doubt that rationing (as you suggest Kate) is better than queueing we have now, but I think Eric's solution is better because it avoids a lot of hoarding (which will still happen under your scenario).
Glad to see you're actually thinking about the issue instead of spouting nonsense like other commentators.
Eric, this is not the situation you’re describing in your artice. More like this:
Customer: Hi, I need to buy a new fridge.
Shop Keeper: Great, I’ve sold heaps of these today. Must have been the power surge. As I’m running low on stock until 2 days, F&P are going to charge a demand tax. It’s for you own good you know, because even though I’ve never met you or know your situation, we have to put steps in to stop almost everyone coming in to purchase one. I may run out completely, unless there's lots of cash in the deal. Then It’s OK.
C: But I can only afford a normally priced one. I need it to cool my insulin, It could be life or death.
SK: Gee, sorry. Even though we’ll have plenty in a day or so, I’m going to charge you much more, because I can tell you’re desperate. Maybe you could come back to my shop then, If you’re still breathing.
C: Yeah right.
You've actually got he situation wrong. Under no price increase, it goes like this:
Customer: Hi, I need to buy a new fridge.
Shop Keeper: We've run out. Everyone panicked and bought fridges and there are none left.
C: But I need it to cool my insulin, It could be life or death.
SK: Too bad, not enough people understood Eric Crampton's article and the role of prices in the economy.
Under Eric's situation:
Customer: Hi, I need to buy a new fridge.
Shop Keeper: Because everyone wants them, I put the price up. Luckily, because of the price increase, we have some left.
C: I need it to cool my insulin, It could be life or death.
SK: Well given that, you'll understand that although you have to pay more for it, the benefit of not dying outweights the increased financial cost. And isn't it great that there are some left because of the increased cost.
ric ---are you giving any consideration to the substantial numbers who are temporarily abandoning their home,s and heading north and south--i,ve seen 10000 p/day figure,s posted here--surly these people make up a fair percentage of service station patrons--are you going to penalise them too?
He's a nutter because all you would see is the rich at the front of the line...better to make the point in the media that supplies are stable as they bloody well are. As an insurer would I fork out on a fire made worse by a large quantity of petrol stored in a garage...probably not.
Chch is pretty well as flat as can be to the Red Cliffs region...so how come so few ride bikes.
The govt has all the powers it needs to close stations to private vehicles or ration supplies to twenty litres. That is plenty enough for any family wanting to reach Timaru.
Supplies may be stable but it doesn't stop petrol stations to be out of stock. Just came back from Rangiora and the petrol station we drove past had no more petrol and a $50 limit on diesel.
As for why people don't ride more... Well, for the first 2 years we were in Chch I didn't use the car once. I rode 30mn each way to work every day whether it was sunny, rainy or stormy. There was a shower at work so it was easy to get changed. How easy is it to do this once you have kids though? I hated having to give up my bike ride but even with just one it was impossible to carry a backpack + preschool bag on my back because it'd have squashed the baby at the back (assuming she was old enough to sit in a bike seat). With 2 or more, it's even more impossible to do that unless both parents can go.
We did (and still do) bike with 4 preschoolers - one in each bike seat, 2 in a bike trailer along with all the gear you need to carry when you go anywhere with kids. But that was only for an outing at the week-end, not on a regular basis to go to work for example (no desire to get up at 5am after a disturbed night just so we could have time to get everybody ready in the morning, drop everyone off where they needed to be and then bike our separate, and opposite, way to work). And quite frankly, Kiwi drivers have no consideration whatsoever for anyone on 2 wheels, so no wonder many people are put off. I stopped counting the number of times someone tried to kill me or even started shouting insults (for no other reason that I had priority and they didn't like it) - getting whistled doesn't bother me but getting knocked off my bike at 5 months pregnant does. A good friend had two serious accidents due to stupid drivers driving too close to him and knocking him off his bike.
Lost track of the threads, so I'll try again.
Let's say I need petrol because I want to take my terrified family away to safety. Yesterday that would have cost $100, but today I am charged $200 dollars. I have waited hours. Will Eric Crampton be on the forecourt with a powerpoint, explaining the situation? If he is, will I feel warmth towards his explanation of the economic model that proves this is sensible? What will the media headlines be?
You know the answer. Forecourt attendants won't be able to explain why the price has doubled (they wouldn't *want* to) and people will be mightily hacked off - the media will be outraged and the already-stretched-to-the-limit Cantabrians might well fill up and refuse to pay. And doing that would get popular support.
But I wouldn't do that. So...I may decide to wait until the price goes down again in two days' time. If I did decide to go home and wait, I am not serenely puffing on my pipe in my rocking chair, reflecting on the genius of Eric Crampton. I may be living in an extremely unsafe place that is getting a 4.5 rattle every few hours. So the fact that I am now in that house longer than I had to be is putting people in danger.
If short-term supply is a problem, then a $30-50 limit will help solve that without p***ing off the masses. That way, you don't have to weigh up the economic value:risk of death ratio while waiting for the price to go down. And people will deem this as fair.
I want everyone involved to make things as easy as possible. No dilemmas.
In summary, the thoery might stand up but Eric is assuming 100% across-the-board passive, unquestioning consent. Somewhere in the mathematics there must be an alowance for that.
You make a good point for political feasibility. However, Eric's larger point is to educate people so that they do "serenely puff[...] on [their] pipe in [their] rocking chair, reflecting on the genius of Eric Crampton".
I'd always thought it a worthy cause to actually try to educate people on relatively basic economics and show how the outcomes are better. Reading the comments on here suggests that it may be a worthy, but fruitless, cause.
It's just like trying to 'educate people' on statistical probablilty. Lotto would not exist, otherwise. What seems to look like good economic theory would not work in practice for that same reason. Too many people would not see the theoretical point when their family safety is put on the line; or worse, try to expolit it.
Let Eric try this: Take $100k out of his savings account at 9.00 am on Monday and put it on the pavement outside his flat, with a note on top "There will be $200k to give out amongst you tomorrow, if you leave this here today". How much do you expect there to be on the footpath at 9.00am on Tueday morning, even if the thoery tells you that 'the people' will have more to divide amongst themselves?
Go for it, Phil W ! I'm all ears. (NB: My example didn't mention what the outcome at 9.00am on Tueday morning would be, did it. Most readers would expect there to be no money on the footpath; including your own expectation, I'd suggest ? That underscores the rational outcome that would occur, and even you, would not be suprised at it.)
It certainly is disappointing to see how many ppl are indulging in unnecessary driving around Chch. But the authorities have compounded the problem. What is the point of telling ppl in the impacted eastern burbs that there emergency supplies in Hornby? Where are the transport sharing/public transport centres?
Those causing queues at petrol stations are mostly selfish gits, and at the very least a quota of 20l or so each would have been good.
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