When the hoarding equilibrium sets in

There were no laws against price gouging. But the petrol stations knew that every single customer would hate them if they were the only station to let prices rise such that supply and demand came back into equilibrium. And so because the stations didn’t gouge, we were in a terrible equilibrium where everyone’s rational response to the below-clearing price was to hoard, because there was real risk that the stations would run out of fuel. And there was real risk of running out of fuel because of the hoarding. Breaking the hoarding equilibrium would have required a coordinated price hike that both allocated fuel to its highest valued uses and told everyone that there would be fuel available for them in an emergency if they really really needed it. That latter part is crucial – it kills the incentive to hoard.

That is from Eric Crampton.  Eric makes a further point.  Even in the absence of laws against price gouging, individual stations may be reluctant to raise prices and incur the wrath of customers.  Yet if all stations would raise prices, and markets would clear, consumers would know they could get emergency gasoline if they had to.  That would help break the hoarding equilibrium, if done collectively.  The real market failure may be the unwillingness to raise prices.

Addendum: Here is what we are getting: “He also said the Defense Department was sending in 12 million gallons of fuel to be pumped from five mobile stations. “They’ll have a 10-gallon limit,” the governor said. “The good news is, it’s going to be free.”


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