Question 4.6
1. The state legislature mandates a price floor for gasoline of PF per gallon. Assess the following statements and illustrate your answer using the figure provided.
Proponents of the law claim it will increase the income of gas station owners. Opponents claim it will hurt gas station owners because they will lose customers.
Some gas station owners will benefit from getting a higher price. QF indicates the sales made by these owners. But some will lose; there are those who make sales at the market equilibrium price of PE but do not make sales at the regulated price of PF. These missed sales are indicated on the graph by the fall in the quantity demanded along the demand curve, from point E to point A.
Proponents claim consumers will be better off because gas stations will provide better service. Opponents claim consumers will be generally worse off because they prefer to buy gas at cheaper prices.
Those who buy gas at the higher price of PF will probably receive better service; this is an example of inefficiently high quality caused by a price floor as gas station owners compete on quality rather than price. But opponents are correct to claim that consumers are generally worse off—those who buy at PF would have been happy to buy at PE, and many who were willing to buy at a price between PE and PF are now unwilling to buy. This is indicated on the graph by the fall in the quantity demanded along the demand curve, from point E to point A.
Proponents claim that they are helping gas station owners without hurting anyone else. Opponents claim that consumers are hurt and will end up doing things like buying gas in a nearby state or on the black market.
Proponents are wrong because consumers and some gas station owners are hurt by the price floor, which creates “missed opportunities”—desirable transactions between consumers and station owners that never take place. The deadweight loss, the amount of total surplus lost because of missed opportunities, is indicated by the shaded area in the accompanying figure. Moreover, the inefficiency of wasted resources arises as consumers spend time and money driving to other states. The price floor also tempts people to engage in black market activity. With the price floor, only QF units are sold. But at prices between PE and PF, there are drivers who cumulatively want to buy more than QF and owners who are willing to sell to them, a situation likely to lead to illegal activity.
