Rafi Mohammed

What's Responsible for the Gas Shortage in Atlanta...Georgia's Anti-Gouging Laws.

Posted on October 2nd, 2008 (1 Comments)

It hasn’t been a pretty scene in Atlanta, Georgia lately: 60 car length lines waiting for gas, over half the area’s service stations closed due to lack of supply, drivers running out of gas, and tempers exploding as service station employees meekly announce “we’re out of gas.” And what's to blame for this? Georgia’s anti-gouging laws.

Gas supplies in Georgia are tight. This reduced supply is a result of damage to refineries caused by Hurricanes Ike and Gustav. And while Atlanta has strict environmental standards that prevent its gas from being brought in from other cities, the Federal government lifted these restrictions in hopes of improving supply in the region. However this hasn’t worked…long lines and shortages remain.

On September 12, Georgia’s governor declared a state of emergency that immediately put into effect the state’s anti-gouging price law. This law prevents retailers from selling goods or services at an “unreasonable” price. Price increases are only allowed if they accurately reflect an increase in the cost of the goods or services to the retailer. So in essence, this means there is no financial incentive for oil companies to be innovative in their efforts to get more gas to the area. If oil companies can only charge what it costs to reallocate gas to Atlanta (e.g., dispatching more tanker trucks full of gas), why bother?

As you know, when faced with a gas shortage, the law of supply and demand dictates that prices rise. This increase is simply a mechanism to allocate scarce gas to those who value it the most. Higher prices also boost supply - as with the prospect of higher profits, oil companies have a financial incentive to make the efforts necessary to increase supply. As a result, gas station owners and oil companies make higher “windfall” profits. Georgia’s anti-gouging laws prevent both these price hikes (which curbs demand) and supply increases. Anti-gouging prices don’t equate demand with supply, hence the shortages remain.

Just to be clear, I am not taking a position on anti-gouging laws. But when facing shortage situations like those in Atlanta, the costs and benefits of such laws should be understood. If gas stations are allowed to set prices in accordance with the market (i.e., no anti-gouging laws): prices will rise, lower income customers will be disadvantaged, and gas related companies will make more money. On the positive side, gas will be available, lines will disappear, stations will remain open, and there will be less of an incentive to hoard (which exacerbates a shortage). In contrast, if anti-gouging laws are in place, shortages will continue. The key benefit is that if you are able to locate a gas station that is open and endure the wait, you’ll fill up at a below-market price…giant emphasis on the word “if.” These are the pros and cons of anti-gouging laws.

So what do you think? Do the benefits of anti-gouging laws overcome the costs?

Thanks to my good friends Bob Cross and Patrick DeGraba for suggesting and discussing this topic with me.

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Readers' Comments on This Blog Entry

From mike on October 2nd, 2008
I am for anti-gouging rules. If it was based on supply and demand only the rich could buy gas. You have to make gas available for the poor so they can get to the jobs. It would be unfair for the working class if the prices were based on supply and demand. I do think the suppliers should get some tax breaks to encourage them to bring more gas to Atlanta.