Gas Prices

Topics: Supply and demand, Pricing, Money Pages: 2 (533 words) Published: September 27, 2011
To prevent gasoline prices from having devastating effects on the economy it has been proposed that all gasoline prices in the United States be fixed at the average price for the last two years. For simplicity it will be assumed that this price is $2.50 per gallon. When equilibrium prices are under $2.50 per gallon the excess payments will be kept in a government fund. When retail prices exceed $2.50 per gallon money from this fund will be distributed to pay the difference.  Do you think that this plan would help the economy?

According to the author, a price ceiling and a price floor are both limits.  One is a maximum limit and the other is a minimum limit imposed on the price of a good or service by the government.  A price ceiling does three things. It increases the quantity demanded, decreases the quantity supplied and creates a market shortage. A price floor does the same but opposite (Brownfield, 2007).  I think that this could help the current situation this country is in. First, what is said is that “that all gasoline prices in the United States be fixed at the average price for the last two years”. This is neither the ceiling nor the floor. It is the equilibrium price - “the price at which the quantity of a good demanded in a given time period equals the quantity supplied”. I believe that oil companies would probably do what they are doing now with the exception that most would do the middle. After all, it is only for two years. There would be fluctuations. What affect would the plan have on the supply and demand curves? A senior writer for CNN Money, stated that it looks like prices are coming down in the remainder of the year. He stated that “this outlook is based on the belief that worldwide economic growth will remain sluggish for the next several years, that consumers will continue to buy more fuel efficient vehicles, and new supplies will continue to come online” Hargreaves, 2011). I think that there will be a slight increase in demand, but not...
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