Price control on gasoline, New Jersey USA

I. What happened

In 2012, Hurricane Sandy greatly damaged New Jersey’s infrastructure and led to a temporary outage that disrupted the operation of some gas stations. Newspapers reported that 60% of the gas stations in New Jersey were closed. The sellers raised the gasoline price by as much as 30% in a day. New Jersey’s Attorney General issued subpoenas to 65 businesses in response to 500 complaints from consumers of price gouging.

II. Price Ceiling

While New York State law made it illegal for merchants to charge an “unconscionably excessive price” for goods that were vital and necessary for consumers, the New Jersey price ceiling policy was more specific. It prohibited businesses from raising their prices by more than 10 percent within 30 days of a declared state of emergency. The policy was intended to make essential goods and services affordable during difficult times.

III. Consequences

Although the price ceiling policy worked on curbing the increase in gas prices, it was incapable of ensuring sufficient quantity to satisfy consumers’ needs. Some sellers were disincentivized to supply gasoline, while more consumers wanted to buy it. As price lost its function to allocate gasoline to willing buyers, other forms of competition emerged as substitutes. For example, one of the common forms was First Come First Serve. People needed to get up early in the morning to line up at gas stations. Those who come early win, and latecomers lose. Eventually, a rationing scheme was adopted to ease the competition, where even-numbered plates were allowed to get gas on some days while odd-numbered plates on other days.

IV. Economics

Some economists suggest that imposing a price ceiling on gasoline causes a shortage and makes consumers worse off. Price plays a vital role in reflecting market conditions to both consumers and suppliers. A market shortage will lead to an increase in price, and a surplus will lead to a decline in price. By observing the price movement, suppliers could recognize the shortage/surplus and enter/leave the market to boost/reduce the quantity supplied. In contrast, consumers facing higher/lower prices will decrease/increase their quantity demanded. If a product can be priced at whatever level to reflect the market conditions, the quantity demanded will be equal to the quantity supplied in equilibrium.

However, a price ceiling means the price cannot be set freely to reflect market conditions timely. As such, price competition becomes a crippled tool for allocating resources to the consumers with the highest willingness to pay. Setting prices lower than the market prices will induce more consumers to compete for the affected products than would be without a price ceiling, aggravating shortages. On the flip side, if the price could increase freely, some consumers would be discouraged from buying the product, and instead switch their demand to alternatives.

On the supply side, a price ceiling disrupts the signal of how dire the shortage is. Suppliers can no longer observe the price movement to get a sense of market condition. Thus they are less capable of adjusting the quantity supplied properly and promptly. Even though they recognize a shortage, suppliers will be reluctant to increase the quantity supplied because of the reduced profitability.

Price ceiling maintain a shortage longer than without a price ceiling. Consumers are worse off as fewer of them could obtain the products, and some of them who are willing to pay a higher price get nothing. Non-price competition may be discriminative to certain groups of people, such as the poor if relationships or bribery is used to compete for the goods instead of price.