Maybe the Variance of Gas Prices Actually Has Increased
By Bryan Caplan
People seem to be searching harder for bargain gas prices. But according to search theory, the reason to search is price variation, not price. On closer examination of pump prices, though, I want to retract my observation that gas price variance is constant. Just yesterday in Arlington, I noticed a $.40+ spread between two gas stations just three blocks apart. (Anyone know of more systematic data?)
The last time I noticed spreads this big was the week after Katrina. So what’s going on? The simplest answer is that some gas station owners take popular perceptions of unfairness into account when they set their prices. Either they buy the popular view, or they think it’s in their long-run interest to pander to the popular view. So while most stations mark prices to market, a few grit their teeth and endure some short-run losses. It won’t last, of course; in a few months the “fair” stations will either swallow their scruples or go out of business.
Adding confusion to the mix: some stations (but far from all) are starting to display prices with a cash discount already factored in. So the prices you see out of the corner of your eye as you drive by are becoming less comparable.
But at least we still don’t have rationing; don’t miss Don Boudreaux’s 70s flashback:
The average price of a gallon of gasoline in 1979 was (in 1979 dollars) 90 cents. So if a worker in 1979, earning that year’s average hourly wage of $6.19, spent one hour waiting in line to buy five gallons of gasoline – a standard maximum amount that filling stations would sell to customers during periods of shortage – he would have spent, waiting in queues, $1.24 worth of his time for every gallon he bought. The total cost per gallon to him would have been $2.14 ($0.90 in cash expense plus $1.24 in time expense). $2.14 in 1979 was worth about $6.36 of today’s dollars — a cost per gallon much higher than the roughly $4 that we Americans now pay (without having to queue up for the privilege of filling our tanks).
Scary. Two and a half months ago I predicted that we’d get them once gas hit $5.50. Now I think I’d say $6.25. Anyone else care to update their predictions?