Monday, February 27, 2006

Minimum gas prices again 

Via Phil Miller, a pointer another enforcement of Minnesota's minimum gas price law.

The Minnesota Commerce Department on Thursday announced plans to fine a gas station chain $140,000 for repeatedly selling gas below the state's legal minimum price.

The fine against Midwest Oil of Minnesota is twice as large as any imposed on a company since 2001, when the state established a formula based on wholesale prices, fees and taxes to determine a daily floor for gas prices.

The fine is large because of the repeated violations (293 days worth), and "had not cooperated with the department on a penalty, and was accused by the department of using several delaying tactics before the matter could be resolved." But the fine works out to $477 per day, spread over at least three stations; last June, the fine was reportedly to be as much as $1.6 million. (I discussed that here.) From $1.6 million to $140,000 is quite a climbdown.

They are selling gas at, let's say, 5% below the minimum. Think: How many extra daily sales would Midwest have to make to get back $477?

(For the amateur economist: This is a question about elasticity, and you'd have to assume something about Midwest's costs versus the cost of mom & pop gas stations. Stations are required to charge 8 cents over cost. How many more cars drive in? How much do they put in the tank? The assumptions needed to make the $477/day worth paying aren't all that unreasonable.)

You'd be hard pressed to find an economist willing to give an economic rationale for this law, and we've heard complaints about it in the past, so its continued existence would seem to indicate somebody likes it. Who would that be? I noticed driving through Hutchinson, MN, over the weekend that three gas stations at the intersections of Hwys. 15 & 7 were closed. Were they mom and pop stations? It's worth noting that the south side of Hutchinson has an Evil Empire with its own gas station, but that's four miles away. Would people drive four miles to save a buck or two on a fill-up? And if WalMart did raise prices afterwards, how long before those three stations are reopened?

Minimum gas price laws raise prices for consumers. You sell products based not on what you paid for what's on the shelf but on what you will pay to replace the product sold off the shelf. By setting prices based on past cost, consumers are forced to pay higher prices for gas while wholesale prices are falling. (The converse does not apply, since you can always charge more than the 8 cents over wholesale cost. Not that gouging laws work, either.)

If the state wanted lower gas prices, it could cut its 20 cent per gallon tax. But instead, it thinks of raising it.