Market Power

Musings by an academic economist on the power of markets and the power over markets.

Monday, March 28, 2005

Minimum Gas Price Law

I posted this piece on Minnesota’s minimum gas price law. Who could possibly benefit from such a law? Walter Williams has the answer in a piece on the Maryland gas price law:

... whose interest is served by, and just who lobbied for, Maryland’s gasoline minimum-price law? If you answered that it was probably Maryland’s independent gas-station owners, go to the head of the class.

Williams argues that the legislation basically boils down to helping a well-defined and concentrated special interest (independent gas station owners) while imposing costs on a diffuse interest (consumers). The concentrated interest is more likely to pay lobbyists and give campaign contributions to legislators who vote for this legislation while there is almost no incentive for an individual consumer to organize other consumers, even if the aggregate costs imposed on consumers exceeds the aggregate benefits.

Let's suppose that the gas price law is known to provide $1,000,000 in benefits to a group of 500 people but imposes costs of $2,000,000 to a group of 4,000,000 people. Those who are helped would be willing to pay no more than $2,000 each (on average) to get the law enacted. Those who are hurt would be willing to pay no more than 50 cents each (on average) to get the law repealed. Where will the intense lobbying likely come from? It will probably not come from those who are hurt even though the total losses felt by them exceed the gains to the other group (we call this a deadweight loss). Why? Because their opportunity costs are likely too high while the opposite is true for the group that is helped. Time spent lobbying is time not spent in other activities - working, spending time with family, etc. – and people must be compensated in order to give them incentive to give up these other activities. Those who are helped are well-compensated. Those who are hurt are not.

Even if we believe that legislators are making decisions in the public interest, we cannot assume that they have perfect information. Instead, they gather information from the interested parties - i.e. from lobbyists. If information only comes from one side, we can expect the legislation to be one-sided as well.