Question: Suppose the market price of gasoline is $5.00 per gallon. Politicians, responding to their constituents who believe that such a price is outrageous, impose a price control of $2.00 per gallon. At this price, you want to buy 9 gallons of gasoline per week but gas stations are now only willing to sell you 5 gallons per week. There is a shortage.
Assume that to buy gas, you must wait in line. Doing so gives you the right to purchase gasoline at the controlled price of $2.00 per gallon. Assume also that you would be willing to pay up to $6 per gallon. Finally, assume that your wage is $10 per hour.
How long will you wait in line to buy gasoline? What will be your total expenditure on gasoline each week? What price will you pay per gallon? Did the price control reduce the price of gasoline?
Solution: This question highlights the importance of considering the full price of a good—not just the money price but also the opportunity cost of time.
With a price control set at $2 per gallon and a willingness to pay up to $6 per gallon, the extra $4 per gallon reflects the value you’d accept in waiting time. Given a wage of $10 per hour, this translates to 4/10=0.44/10=0.4 hours, or 24 minutes per gallon. For 5 gallons, you’d wait a total of 2 hours per week.
Your total weekly expenditure combines:
- Monetary cost: 5×2=105×2=10 dollars
- Time cost: 2×10=202×10=20 dollars
Thus, total expenditure = $30 per week.
Dividing by 5 gallons gives a full price of 30/5=630/5=6 dollars per gallon.
Although the nominal price fell from $5 to $2, once you account for waiting costs, the effective price rose to $6. Therefore, the price control did not lower the true cost of gasoline—it actually raised it.
READER COMMENTS
David Henderson
May 8 2025 at 4:27pm
Good analysis, Bryan.
You are making one assumption that I think you should make explicit. You’re assuming that because you’re willing to spend 2 hours in line, you have to spend 2 hours in line.
It’s a reasonable assumption, but to get there you need to know more about other people’s time values and willingness to line up.
In 1979, when the gasoline shortages were at close to their worst, the average of price of gasoline was about 80 cents per gallon. Some economists in the Department of Energy estimated that the market clearing price in the absence of price controls was $1.00 per gallon.
I read estimates of the average waiting time and got the BLS measure of average wages. I calculated that the price of gasoline, including the time price, was $1.20 per gallon.
Bryan Cutsinger
May 9 2025 at 12:39pm
David,
You’re absolutely right–I should have been explicit about that. What I should have written is that, in equilibrium, the waiting time adjusts to clear the market, so that the time cost of waiting, combined with the controlled price, equals the willingness to pay of the marginal buyer.
Did you ever publish that result anywhere? I’d like to use it as an example in class.
Hope you’re well!
Bryan
David Henderson
May 12 2025 at 1:38pm
Thanks, Bryan.
I didn’t publish that result, but as it happens, I’m working on my tri-weekly Hoover article right now. I’m writing up a related point I made in class, pretty much every class I taught for the 20 years before I retired, a point that I haven’t seen made and that I hope will become a teaching note for economics professors. I’ll send you an email when it ‘s out. Assuming my editor accepts it, and the odds that he will exceed 0.95, it will be published on Thursday.
Matthias
May 10 2025 at 5:35am
You should pay some other guy who values his time less to wait in line for you. (Or guys.)
Details depend on how they track the rationing.
Bryan Cutsinger
May 11 2025 at 11:28am
For the sake of argument, suppose all gas buyers have the same willingness to pay for gas and the same wages. Competition gas buyers to hire people to wait in line for them would drive the wages of line-waiters higher until there’s no difference between paying someone to stand in line for you and standing in line yourself.