Is the Price of Gasoline Really Too
From EconEd Link
Planning any road trips this summer? Maybe to the lake or a new city. How about a national park or even an amusement park? If the answer is yes, better hope you have a ride that is fuel-efficient or get ready to feel the pain in your pocketbook because you and your traveling buddies will face some of the highest gasoline prices ever. It is hard to believe that just two years ago, we were paying much lower prices. What happened here? How did U.S. consumers move from paying incredibly low to incredibly high gasoline prices in just short two years?
Let's look at two, hypothetical 1000-mile road trips, one taken in 1998 and the other in 2000. For the 1998 trip assume we paid $1.10 per gallon and our sport utility vehicle got 18 miles to the gallon. Calculate the fuel cost of the trip. What would the same trip cost this summer? Let's assume we have the misfortune of paying the highest gasoline prices currently available in the US at $2.28 per gallon. Calculate the fuel cost of the trip. Not impressed? What if you commuted 100 miles per day in that same sport utility? Calculate the yearly fuel expense for 1998, assuming you drive five days per week and take three weeks of vacation. Now calculate the cost of that same commute for 2000. How is your checking account feeling now? Do these high prices seem out of line, unfair, or just too high? What do you think is going on?
Many individuals, business owners, and politicians are complaining that the price of a gallon of gasoline is just "too high." What do people mean when they say "too high"? The notion of a price that is "too high" implies that consumers are being somehow unfairly treated or abused by overzealous corporations. In a market system, producers must compete for consumer dollars, with price determined by the interaction of supply and demand. Under competitive circumstances, we do not consider a price too high or somehow unfair; we accept the actions of buyers and sellers as the most efficient method for allocating resources. In other words, if some people want to pay $75 for a ticket to Bruce Springsteen concert, that is their problem. If, however, the market is less than competitive and firms are not competing in a legal way for consumer dollars, we have a situation where prices may actually be "too high." In this Economics Minute we'll try to determine what forces are driving the high price of gasoline and if the market is competitive. If the market is competitive, then the high prices we are experiencing are appropriate given the current levels of supply and demand. If, on the other hand, the market for gasoline is not competitive and firms are artificially manipulating prices, then the current price of gasoline is too high and some government action may be necessary.