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Should there be a set price on gasoline?

Module 4.02 Economics FLVS
by

Dori Davies

on 24 July 2013

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Transcript of Should there be a set price on gasoline?

photo credit Nasa / Goddard Space Flight Center / Reto Stöckli
Should There Be A Set Price On Gasoline?
What Determines Gas Prices Anyway?
Gas prices are determined by these basic economic terms: supply, demand, inflation, and taxes.
The breakdown-
*Supply: the crude oil itself, where it comes from, it's quality, etc.
*Demand: how many consumers there are (dependent on the country, state, region, city, etc.)
*Inflation: even though the demand for gasoline is relatively elastic, there is inelasticity when considering demand, which means when prices go up the demand goes down (buffered by government subsidies)/
*Taxes: There are federal, state, and local taxes on gasoline and these also fluctuate and vary from place to place as well as can be considered the largest price component for gasoline.
The Differences in Crude Oil and What That Means for Prices
The supply, crude oil, comes from many different places as well as in many different levels of quality. This quality is described as the oil's viscosity (light to heavy) as well as the level of impurities it contains (sweet to sour).
The Breakdown-
*Light/sweet crude oil is the type of oil in highest demand because it has the least impurities and is has a quicker refining process (cost is higher to buy because it takes less refining etc).
*Heavy/sour crude oil on the other hand has more impurities and takes longer to refine therefor having a more expensive refining process, but refiners can purchase this oil at a much lower price (possibility for higher cost at resale).
What Would Setting a Price Ceiling Do/Look Like?
A price ceiling is where the government sets a legal limit on the price of a product (like gasoline). For it to be effective it needs to be below the natural market equilibrium. However, as shown in history, putting a ceiling on gas prices would create a shortage of gasoline. This leads to problems where the only "solutions" are lotteries, black market, the concept of first come first serve.
Some restrictions and limitations are in need of being set to prevent drastic fluctuations in gasoline prices to prevent shocks etc. There have been in the past as well as things that are being addressed currently about what needs to be done on the gasoline front. From oil drilling, to refining, to establishing percentages of taxes etc there needs to be protocols and standards (environmental, health, and financial). There are also many controversies about "to drill or not to drill", the US has places that hold valuable oil but those places also happen to be important ecosystems and fear of things like the Gulf Spill and other environmental damages are the largest barriers against drilling closer to home (to lower supply shocks). All in all a set price would also be a negative because even though it prevents the prices from rising it also prevents them from lowering (the natural roller coaster of fluctuation).
Module 4 in the FLVS Economics class

http://www.investopedia.com/articles/economics/08/gas-prices.asp

http://economics.fundamentalfinance.com/price-ceiling.php

P-price ceiling
MB- price consumers are willing to pay
Notice the gap >
To Control or Not Control?
Sources:
Full transcript