Capping gas prices: The right way?

Price caps are never a good idea.  Arbitrarily restricting prices so they can't rise to where the market determines sounds good in principle--who doesn't like lower prices?  But in practice, artificially low prices lead to shortages, and really mad people.

That's why capping gas prices is a bad idea--unless you're trying to sell more cars.

From CNN.com:

Chrysler...announced an offer that caps the price of gasoline at $2.99 a gallon for three years for people who buy or lease new vehicles from Wednesday through June 2. The offer is based on 12,000 miles of driving per year at the vehicle's rated fuel economy.

Customers will get a card for buying gas that is linked to their own charge account, Chrysler said. The customer will be billed $2.99 a gallon, and Chrysler will pay the rest.

Y'see, this isn't really a gas price cap.  The market price of gas will still adjust.  The cynic in me (aka my inner economist) is willing to venture that Chrysler simultaneously suspends other discount programs (rebates) so that the price of their cars effectively rise by the amount of the expected gas discount. 

Comments

[fuel additive]

I learned in basic economics that this kind of thing was a bad idea. It always leads to more problems.

[Geoff Milburn]

While this isn't a true cap on the price of gas (since it's not legislated, and Chrysler will just eat the cost), I still fear that people will point to this as a "good thing to do".

I wrote a brief article on why gas price caps are not a good idea, check it out here if you like:

http://www.gmilburn.ca/2008/05/11/a-cap-on-the-price-of-gasoline-is-a-bad-idea/