The price of gasoline has been going up and so has consumption. It used to be that the $1.00 mark would induce reduced consumption (just like the text book says it should). Well not anymore. So what is up? Has the price mechanism failed? Depends who you ask. Conventional economists are going to talk add infinitum about elasticities of demand. But in order for that story to make any sense they will have to explain a rather sudden change in the elasticities of demand.
I don’t buy it. What we are really witnessing is capitulation on the part of the consumer to higher prices. The gas companies tested higher prices and discovered there was no backlash in terms of consumption, or a sustained push by government to open the books. Gasoline is like other addictive substance. The initial effect of a price increase is hesitation by the consumer then capitulation to a new price level. That is, for various reasons the price mechanism simply does not work the way the textbooks describe.
Despite the fact that producers have known, since at least Katrina, that capacity was low and despite the fact that oil companies have been making mountains of cash, new refining capacity has not been planned for the last two decades and there are no new refineries on the short term horizon. Indeed, it appears that both the demand and supply side of the price mechanism have failed.
All of this amounts to a prima facie case for government to regulate the price of gasoline even on terms determined by orthodox economic analysis. Don’t hold your breath. As we have discussed before, mainstream economists are loathed to advocate for the regulation of private markets even when they are failing. Queue Friedman’s Ghost.