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TEACHING TOOLS: INTERTEMPORAL RESOURCE ALLOCATION: DISTRIBUTIVE ISSUES SURROUNDING GASOLINE PRICE HIKES
Author(s) -
BUTZ DAVID A.
Publication year - 1991
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1991.tb00849.x
Subject(s) - economics , distributive property , outrage , gasoline , production (economics) , economic surplus , welfare , microeconomics , price setting , monetary economics , market economy , physics , mathematics , politics , political science , pure mathematics , law , thermodynamics
This paper shows that many people misinterpreted the gasoline price increases that followed Iraq's invasion of Kuwait in August 1990. Consumers expressed outrage when prices increased immediately even though a production shortfall did not materialize for several weeks. But by withholding output in the invasion's aftermath arbitragers (including oil companies) reallocated output intertemporally to make more available when it was needed most. The welfare consequences in general depend upon demand elasticities and their rate of change, but in this instance consumer surplus would probably have been maximized with a full and immediate price adjustment and oil companies profited from their restraint.