Gas Shortages: Cutsinger’s Solution

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.