The Gasoline Market
By Arnold Kling
Megan McArdle likes to tell a story with charts.
I like to tell it this way. There is a wholesale market for gasoline, and there is a retail market for gasoline. Gas stations buy in the wholesale market and sell in the retail market, with essentially no profit margin.
If I’m a gas station selling for $3.18 a gallon, the instant that the tax is cut by $.18 I have an $.18 profit margin. That is not going to last. It is going to be competed away.
I might try to lower my price and sell more gas. If every gas station does this, then the price goes down and the consumer benefits. But in order to get more gas, I have to bid for it in the wholesale market. And we can’t get more gas out of the wholesale market, because for the next few months the supply is essentially fixed. So what’s actually going to happen is that the gas stations are going to bid up the price of gas on the wholesale market. In fact, this process is going to reach a point where in order just to keep my share of gas, I’ll have to bid higher by $.18. The net result is that more money goes to refiners, my gas station pays less in taxes, but we pay more for gasoline wholesale, and the consumer gets no benefit.