No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Five: Supply & Demand: Markets at Work 112 all of us—it should make sense that we as a society have to consume less gasoline, at least temporarily until full production can be restored after the hurricane has passed. So the question becomes, how can we most effectively and efficiently allocate the remaining gasoline? As we discussed earlier, there are many ways; but ultimately we must ration due to scarcity. This video will help summarize the issue. Price Gouging - Stossel In The Classroom We could say that everyone gets the same amount of gasoline. During WWII, for example, citizens were given ration cards that allowed them to buy only a certain amount of any good (see Figure 5.2 ) . If we did that, the college student who lives on campus would get the same amount of gas as the truck driver. The truck driver would have to quit work, while the college student might have more than enough gasoline to regularly race his ’67 RS/SS Camaro! Or we could say that rural citizens get twice the gas as those in cities, since they need to drive farther to get anything. Or we could choose any other politically determined method of delivery. Or….we could ration through the price system . The price system has the tremendous attribute of conveying information within the context of incentives. One only needs to respond to the incentives inherent in relative prices; you don’t really need to pick up on all the information content! In our gasoline example in Figure 5.1 , people will reduce consumption, which is exactly what we want them to do. They don’t need to know there is a hurricane; they don’t need to understand that we as a society want them to consume less; they don’t need to know how long the hurricane will disrupt production. They also don’t need to weigh what the higher valued uses of the gasoline might be—they just need to respond to the incentive, and voluntarily reduce consumption. It is sufficient if just a few understand the details (speculators, oil producers, etc.) to take more defined actions; most just need to respond to the price incentives and the social goal of preserving scarce gasoline for higher valued uses will be met. Nobel Laureate F.A. Hayek first identified this function of prices as a way to communicate knowledge in his path-breaking 1945 article, “ The Use of Knowledge in Society .” Hayek stated : “Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply Price system: Markets coordinate the allocation of scarce resources via changes in consumer and producer behavior due to changes in relative prices. Relative prices contain sufficient information for economic agents to make socially optimal choices. Figure 5.2, WWII Gasoline Ration Card