Gasoline Is Not a Public Good

Wed, 02 Jul 2008 14:26:18 +0000

Stan asks an interesting question:

If consumers are willing to pay higher prices for gasoline, why should we think that energy companies are going to do anything but charge those higher prices?

We should not think anything but that, except that we should acknowledge that producers of any good might be willing to trade off some short term profits for greater profits over the longer term. With gasoline, we are certainly not in that environment, whether or not we ever were. (Were low energy prices of past decades "teaser" rates? Did we get discounts on our first "hits" of petroleum?)

He then asks two other questions that come up in various guises when dealing with economic policy:

In other words, in what's supposed to be a market-driven economy, aren't we complaining about the market working?

[...]

Finally, are we starting to think of gasoline as a public good that the government should provide?

On the first of these questions, people complain about the workings of the market all the time. Well functioning markets allocate resources to those who value them the most--in the sense of being willing to pay the most for them. The end result of that allocation may strike some as unfair or unjust, particularly if endowments of those resources were initially distributed in arbitrary and unequal ways. It is my view--an opinion based on a reading of history and an observation of current events--that most interventions that might be done in the workings of the market (i.e., in the determination of the prices as opposed to the distribution of the initial endowments) make matters worse.

On the second of these questions, we absolutely should not think of gasoline as a public good. Public goods have a specific definition, related to being non-rival in consumption (my consumption of the good doesn't preclude your consumption of it) and non-excludable (the producer of the good cannot prevent consumers from consuming it). A gallon of gas has neither of these characteristics. High prices should lead, over time, to more supply. If government regulations or taxes are interfering with that expansion, that should be the principal focus of government activity.