Should consumers boycott gas stations?

Gas prices are higher than in recent memory, Californians are paying $2.18 a gallon for regular gas, some industry sources are predicting $3 a gallon by summer.

Why? Oil prices are high, and many refineries are switching over to summer fuels. Other refinery operators are passing on the costs of producing gasoline with ethanol, read this account.

On the brighter side, the all-time gas price high, in real terms, came in 1981. Gas then sold for a current-day equivalent of $2.80 a gallon.

Gregg Easterbrook adds some further perspective:

The average price of gasoline during the 1950s was about $1.80 in today’s money–meaning that during the period enshrined in our collective political nostalgia as Energy Heaven, gasoline cost slightly more in real dollars than the amount now being theatrically bemoaned as a “record” price. But wait; in the 1950s, per-capita real income was less than half what it is today. That means that for the typical American in the 1950s, gasoline cost twice as much, in terms of buying power, as today’s gasoline. Adjusted for inflation and for buying power, the purported “record”-priced gasoline at your pumps now is substantially cheaper than the gasoline your parents bought.

Some consumers are calling for a boycott of major suppliers, such as Exxon. Supposedly this will force prices to fall. But no, we cannot count on this action, even if massively coordinated, to improve consumer welfare. Why not?

A boycott of this kind, in essence, imposes a price control on the market. No one will buy unless the price falls to a certain level. In theory this can force the price back down to a more competitive level. But the reality is different. Even when monopoly power is present, the record of price controls in improving consumer welfare is a dismal one.

If we wanted to organize a truly effective boycott, one that would increase consumer welfare, what should we do? Here is one of my favorite counterintuitive economics results. Buyers should tax their own purchases of gasoline. You read me right, and here is a formal treatment, what is the intuition?

Let us work backwards to the result, starting with another case, namely a country exporting oil on a perfectly competitive basis using many separate suppliers, but where the country as a whole is a major supplier with market power. That country would benefit by taxing its exports of oil, in essence forcing firms to raise their prices, thereby mimicking a collusive outcome and capturing some rents from the tax-created market power. (Of course this result assumes that the revenue from the tax isn’t wasted. And the smart aleck in the back row will observe that many countries subsidize their exports, rather than taxing them, this may simply be a policy mistake!)

OK, now say you are a dominant buyer in the world market. You want to apply the same logic in reverse. You can move the price in your direction by taxing your own transactors. By taxing your own buyers, you force them to “collude” and restrict their purchases, thereby forcing the price down from abroad (again, it is assumed that the tax revenue is not wasted but rather benefits the citizenry). The large buying country reaps a greater share of the surplus from trade, if the tax is set at the right level.

Yes, this does mean that exorbitant EU gas taxes are not as stupid as they might seem at first.

Going back to the boycott idea, every boycotter should agree to rip up, say, $3 for every $10 worth of gas she buys. If there is no coordination, this is a mere transfer and there is no loss. If there is coordination, the U.S. gains from exercising monopsony (major buyer) power and forcing the price down. Tearing up the money is like a self-imposed tax. Even better, we don’t have to worry about the government wasting the tax revenue. As people destroy their money, the money of others is worth more, thereby ensuring that no real resources are wasted.

Thanks to Erte Xiao for the original query and pointer, and to Bryan Caplan for some useful discussion.

Addendum: Air genius Gary Leff is also a gas genius, he forwarded me this link.