When Paris doesn't get fed

Prices only work when they are allowed to work

I got gas.

I mean that I recently bought gasoline. 👍 Now usually that isn’t much to talk about. It’s definitely not normally a topic to send to our dozens(!) of readers.

But after the Colonial pipeline was hacked a few weeks ago and people near where I live in Georgia all rushed to get gasoline, it became a real headache when and where I’d be able to buy gasoline or whether I’d run out of gas somewhere with a baby in the back screaming.

For a few days, I tried the gas stations on my normal routes to work and to daycare. No dice. Then finally, I had to commit to going out on a solo mission just to find gas. In the outskirts of the Atlanta area where I live, that meant driving miles between stations. No gas. No gas. Line for a half-mile. No gas.

There I was driving, wasting more gas each mile along the way, while there is a SHORTAGE of gasoline.

While this newsletter is usually focused on more advanced topics within price theory, the whole episode (news coverage, editorials, and that wretched place called Twitter) reminded me that the basic basics are too important to neglect.

How does Paris get fed?

To make sense of the gas shortage, it is helpful to think of why there usually isn’t a shortage. As Bastiat asked: how does Paris get fed? This is the central question of economics.The simple answer is “prices”. The rest is commentary.

It’s a remarkable thing when we take a moment to consider it. The world is constantly changing around us. New oil is found all the time. Cars change every year. Many people take road trips in the summer but not in the winter. All these changes and still I can easily buy gas on every road at any time of day.

If many more people in June want to take road trips, consumers drive up prices. If natural gas is found in North Dakota, people find ways to use natural gas as a substitute and prices will fall.

The prices give them the knowledge that this resource is relatively more or less abundant and the incentive to respond to that change in circumstance. The beauty is that with prices, almost no one needs to know why the price is changing. In fact, people may not even realize that they are responding to prices. They still do.

As F.A. Hayek explained in “The Use of Knowledge in Society”,

Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose—and it is very significant that it does not matter—which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply.

If this is all elementary, remember that most people don’t understand it. There are lots of versions of a similar story, but Mikhail Gorbachev reportedly asked Margaret Thatcher: How do you see to it that people get food? She didn’t; prices did.

When Prices Fail

When a pipeline is taken out of commission or when people rush to get gasoline, both imply the same thing; gasoline is relatively more scarce.

One problem: prices only work when they are allowed to work. Prices have to change to reflect scarcity. That didn’t happen in Georgia.

I told you that I got gas. I didn’t mention that I filled up a full tank at Kroger for $2.89 per gallon. That price is lower than I paid a few weeks earlier. Why didn’t prices rise? This wasn’t some advanced strategy whereby Kroger was gaining my future business through low prices.

No. It’s a tale as old as time, following week 3 material in Econ 101. The governor invoked a state of emergency, which includes anti-”price gouging” laws. Basically, the government threatened to fine companies $5,000 if they raised prices too much.

(Don’t worry, they suspended the gas tax. The exercise is left to the reader as to whether that improves the shortage.)

The idea of price-gouging laws is to help consumers, but was I helped by the law?

I was happy the price was so low after I found a station with gas. A low posted price is no good if the store is out.  The cost of the gas includes both the price and the time spent driving (around an hour). Given I don’t usually search hard for the lowest-cost gas station around, the time spent searching is more costly to me than the savings in price.

The gasoline became relatively more scarce. No law can change that. Gas has to be rationed somehow, either by prices, waiting, or some other mechanism. I personally would rather the government let the price rise in response. Given how little effort most people spend searching for the lowest price gas, they reveal they prefer the price ratio as well.

That doesn’t mean everything is fine and nothing changed. It’s not good that hackers held up the pipeline. That destroys value. It’s not good that people are spooked into rushing to the gas station. But prices rise to incentivize people to use less gasoline without the waste of time.