Thursday, April 17, 2008

It's a Gas, Baby

Pop quiz:

You own a gas station. Your cost for gasoline is 4-6 cents cheaper than the price on your pumps. Congresscritters, in their infinite wisdom, declare a federal tax holiday, reducing wholesale and retail prices by 9 cents per gallon (which it won't, but let's just say it does).

Knowing, then, that you can purchase gasoline at a retail price today lower than your wholesale cost in six months, and that any "taxes" collected on the sale of stocks purchased during the tax holiday and sold after it go in your pocket, not to the government, what do you do?

What do you do?

Extra Credit: While you have your supply and demand curves out, show, also, the resultant effect on the equilibrium price of storage tanks and fuel trucks.

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Anonymous Nathan P. said...

You're underestimating the power of competition between gas stations. I've heard that people will often prefer gas stations on the basis of a few cents per gallon, especially if the competing stations are near each other. So yes, while some of the profit would be captured by the station, there would indeed be a drop in prices.

As to the effects on trade and so forth, it'd result in massive backlogs on purchases, shipping, and other items that would eat into those profits. It would also encourage gas station owners to purchase durable or even permanent items on the basis of temporary expansions.

The result of the economic disruption is overall that profits would go up in the short term, but down in the long term. A long-term tax break causes profits to go up in the long term, but a short-term tax break only causes them to go up in the short term. Over the long term, calculational disruption can cost more than the gains from the short term tax drop.

Of course there's not much point talking about this now since Obama isn't likely to put up a gas tax holiday. Still, you posed an interesting problem, and it amused me to try to resolve it.

9:16 PM  

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