Friday, November 09, 2012

The Fallacy of Gasoline Rationing

If you haven't heard, the lines at the gas stations in New York City and other areas affected by Hurricane Sandy have been very long. In response, New York City is following New Jersey's lead and introducing a rationing system based on license plate numbers. Referred to as odd-even, you can buy gasoline only every other day. If your license plate ends in an odd number, you must buy on odd numbered days. If it ends in an even number, you must buy on even numbered days.

This morning I heard a commentator on the radio claim that this will reduce demand. In fact, he said it would reduce demand by half every day. This is nonsense. Rationing does not reduce demand. Think of it this way. Suppose you drive your car 100 miles per day and get 20 miles per gallon. If you fill up your car every day, you will buy five gallons per day. Under the rationing system, you will buy 10 gallons every other day. In other words, demand hasn't changed. What has changed is how frequently you visit a gas station.

So, yes, odd-even rationing can help alleviate the long lines at the gas stations. It won't, however, reduce demand. In the short run, the only thing that will reduce demand is if people drive less. Unless rationing causes more people to rely on public transportation or prompts them to car pool, it will have no effect on demand.