Tuesday, November 04, 2008

Rational Response

Several months ago, I noted that the rational response to daily increases in the gas price is to fill up every day. This is because the goal is to have the cheapest gas possible in your tank, and when prices are going up, that gas is what you can buy today - not tomorrow.

Now prices are plummeting, to a degree I find pretty shocking. But I wanted to let you know - when gas prices are falling, the rational response is to go as long as possible between fill-ups. The goal is to let prices drop as far as possible before filling up again. If gas stations change their prices in the afternoon, fill up in the evening. Try to avoid driving if it will let you stretch the time between fill ups for even a day or two.

You still want the cheapest gas possible in your tank, but with prices falling that is the gas you can buy tomorrow, not today.

3 comments:

Ben said...

Okay, but what about that time in Atlanta a month or so ago when there was a shortage of gas which was exacerbated - if not created - by the fact that so many people were topping off. (And, because of the shortage, gas prices were rising.)

What's rational in that case?

-Dave said...

For gas stations to be able to raise their prices enough to discourage panic-buying.

In Atlanta's case, the problem was that the perceived value of gasoline - through scarcity - went well above the price. The security of having a full tank tomorrow if everything runs dry is worth well above $3 or $4 a gallon.

At a high enough gas price, people are encouraged not to buy now, because you have sufficient hope that the price will come down before you have to fill up enough that the extra cost isn't worth it.

Assuming that this isn't allowed to happen as in Raleigh, topping off is still the rational individual solution ("Why should I be the person who's left running dry?"). But because prices are held artificially low, the rational action creates a shortage.

But my comments were largely dictated by a market with plenty of supply and regular, predictable price increases. Overall consumption in society would remain constant, so the problem is not with topping off under normal circumstances.

Topping off creates problems when there is a limited supply disruption and suddenly every car in the area - some nearly full, some nearly empty, and everyone in between - wants to use that limited supply. In a normal market, a decrease in supply leads to an increase in the price. But in America (well, in Raleigh), we sue, punish, and villify people who dare do that (even though we are willingly buying gas from them in the meantime).

-Dave said...

In short, our policies create the shortage. The rational response is to join the mob, because you're stuck in a Prisoner's dilema with millions of nameless people.

The charitable response is probably to forgo, so that someone else can buy the gas you might have bought.