I recently finished up a Master's program in Economics at San Jose State (although I'm still waiting for the degree to arrive in the mail). I had hoped that this would make me better equipped to write insightful commentary about our political economy, but thus far, the main effect I have noticed is that people will now ask me questions I don't have good answers for.
It seems that a day does not go by where I am not bombarded with inane questions like, "Why does the economy suck?" and "What is the stock market going to do tomorrow?" and "Why aren't you wearing any pants?" Okay, perhaps not bombarded, as I have this bad habit of drinking other people's milkshakes and eating their cookies with rabidly enthusiastic zeal. So I try not to subject the good peoples of the world to my presence that often. And okay, maybe those questions aren't really so inane. Except for that last one. But they are certainly not questions that economists are well equipped to answer (and I'm not even an economist, I just play one on the Internets).
Take gas prices.
Everybody always wants to know "Why are gas prices are so high?", "When are they going to come down?", "What should the government do about it?", and "Shouldn't my question about your lack of pants have cued you to put some on?" My answers are inevitably along the lines of "Because the demand for gas is outstripping supply," "When supply catches up to demand," and "There isn't a whole lot government can do." Oh, and if you must, "It might have been a real useful reminder, were I not pointedly ignoring your inane questions in the first place. Besides, the economy sucks and gas prices are so high, so how do you expect me to be able to afford any pants?"
Anyway, I'm no expert on the oil market by any means, so I'm not equipped to explain exactly what fluctuations in supply or demand are causing high prices or what to expect from prices in the future. Gas and oil prices are affected by a variety of complicated factors that I don't understand very well, like refining capacity (the old blogger me would've spent weeks or months trying to learn more about it before giving up and never writing this post -- you probably want that guy back now, don't you?).
As for the government, intervening in the market is a pretty dicey proposition. The obvious thing government officials could try is to set a price control. For example, mandate that sellers can't charge more than $3 a gallon. On the face of it, this seems sensible enough, but the problem is that it leads to unintended consequences. I won't bore you with the graphs, but suffice to say that the price is a signal that transmits information to both the buyers and the sellers about what is scarce and what is plenty. If the price is high, everybody -- both the buyers and sellers -- instantly know that the resource or good is scarce (too many buyers, too few sellers), and vice versa.
In addition to that information, the price simultaneously creates the incentives for both buyers and sellers to allocate more resources towards addressing scarcity. A high price encourages buyers to conserve and also encourages more sellers (and sellers of alternatives) to find ways to produce more. A price control thus disrupts the flow of information and disables the incentive mechanism. Forced to sell gas at a lower price, many sellers will stop selling and go into some other line of work (I hear some people juggle geese). Fewer gas sellers results in a shortage of gas which worsens the scarcity problem. Furthermore, when the price is lowered, buyers consume more, also worsening the scarcity problem. After all, we did actually try price controls during the energy crisis in the 70's. Made things worse. Plus, rent control in New York City led to abandoned buildings cuz landlords couldn't charge enough to make it worth doing. Price controls == bad.
Well, what about the oil corporations? Aren't they gouging us consumers? Well... no. The price is determined not just by supply, but equally by demand. This means that consumer behavior has as much control over the price as producer behavior (with the exception of monopoly and monopolistic competition, which you can argue is the case here with OPEC, but not so much with oil companies, who are dealing with a fungible good). Furthermore, if oil companies could boost their profits by raising prices -- why didn't they do it earlier? Why not sell gas at $5 a gallon from the start? Why wait until oil prices went up? I realize that this prompts the obvious question, "Why did you wait for gas prices to go down to write this post?" Well, um, it has something to do with the answer to the pants question.
Sadly, there are no obvious bad guys and no easy solutions, despite what any politician may claim. Offshore drilling will help increase supply somewhat, but as I understand it, the effect will be but a drop in the bucket, I mean barrel. Investment in alternative energy will take many, many years to affect gas prices (and whether or not government should subsidize such research is a debate I won't get into right now). In fact, I and many economists think the most sensible thing to do is to impose a gas or carbon tax, which would actually increase the price in the short term (refer to Mankiw for more on that). Why? Well, partially due to externalities, which I won't get into, but also to accelerate the market's response to scarcity (why a self-described libertarian such as me would support a new tax is something else I'll have to defer for later -- note that Mankiw is a New Keynesian, and thus not very libertarian).
So don't expect the government to help you out on your gas bill. The best help they could possibly offer will only affect the long-term, and what they are more likely to actually enact is just symbolic policy that sounds good but accomplishes nothing (except perhaps help their campaign donors). The only thing you can do is change your behavior and use less gas. Simple as that. None of this stupid "buy no gas on XX day or from XX gas station" stuff that just shifts demand around. To actually lower demand, you have to use less gas. Walk and bike more and take public transit more. Carpool. Drive less. Buy more efficient cars. All that stuff you already know, and indeed, what many of you are already doing without having to be told to, such is the wonder of prices (and the resulting decrease in demand is actually what has lowered prices as of late).
Okay, any more questions? Oh right, pants. Fine, fine. I'll start looking for a job after I get back from Burning Man, okay?
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