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Summary of the Case
The concept of a price ceiling in the oil industry is not only common in Australia, but also in other countries, including the United States. Issues such as labor disputes, natural disasters, and an increase in the price of crude oil have a direct impact on the supply of petrol. They tend to reduce supply. Under such circumstances, the supply will be greater than demand. Given the fact that governments have a price ceiling beyond which a firm cannot price their products, the common phenomenon during such shortage of petrol is long queues at the gas stations. Most of the owners of petrol stations do not consider spending more because they lack incentives that always come with a price increase.
Introduction about the Topic
A price ceiling is a concept that many governments have embraced as a way of protecting the interest of the poor members of society. Oil is one of the most important factors of production and changes made in its price erratically may have serious consequences on the lives of the poor. Firms always transfer the cost of production to their consumers (Common and Stagl 87). It means that even if the poor do not buy the product directly at the gas stations, they will have to pay the price in form of the increased cost of basic goods. Although the price ceiling helps in protecting the poor, its main disadvantage is that it does not help in addressing the problem of product shortage, especially in times of crisis.
Analysis of the case
Long lines at gas stations are common phenomena when there is a crisis that affects the supply of oil within the country. Incidents such as an increase in international oil prices, labor disputes, and natural disasters all have the effect of reducing oil supply within the country. When this occurs, there will be an imbalance between demand and supply. The demand for the product will exceed its supply due to the shortage. According to Mankiw, under normal circumstances, forces of demand and supply are allowed to determine product price (24). It means that in cases where the demand exceeds supply, then product price shall be expected to increase.
This is one of the best ways of eliminating long queues that are always common at gas stations when there is a shortage in oil supply. By increasing the price, a section of the consumers, the poor, will be eliminated from the bracket of those who can purchase the product. The price shall increase to the level where demand and supply will be at equilibrium. This means that most of the consumers shall be unable to purchase the product as long as the supply issue is not addressed.
The government realized that allowing the forces of demand and supply to determine the price of oil may be unfair to the poor because they may be forced to avoid purchasing some of the products considered basic. That is why the price ceiling was set. As presented in this case, the price ceiling has its benefits, especially in protecting the interest of the poor. However, it comes with some challenges too. For instance, if oil firms are allowed to price their products based on the demand, the problem of oil shortage can be addressed more easily than when the price ceiling is set. A price increase will be an incentive for oil companies to go the extra mile in getting the product from other regions that are not affected by the shortage (Lipsey and Harbury 78). Governments may need alternative ways of motivating these oil firms.
The price ceiling on the oil industry is something that many governments may not afford to abandon as they try to protect the poor. However, the case reveals that this concept always leads to long lines at gas stations whenever there is an oil shortage. To solve this problem, governments should come up with alternative ways of motivating employees such as tax incentives when there is a crisis that leads to an oil shortage.
Common, Michael, and Sigrid Stagl. Ecological Economics: An Introduction. New York: Cambridge University Press, 2005. Print.
Lipsey, Richard, and Charles Harbury. First Principles of Economics. Oxford: Oxford University Press, 2008. Print.
Mankiw, Gregory. Essentials of Economics. Stamford: Cengage Learning, 2015. Print.