If I ever become an Economics teacher or professor (rather unlikely), I’m going to go back to DC and take a picture of the scene I saw there with gas stations.
Gas in most parts of DC was $3.99 to $4.09, about the same as it was here in New Hampshire. But then we drove by a gas station inexplicably charging something like $4.59 a gallon, directly across the street from a place charging something like $4.39 a gallon. My gracious hosts told me that the price discrepancy was long-running: these places have arbitrarily* charged significantly more for quite some, and remain in business.
The reason I’d begin with this is threefold:
- It’s a good way to demonstrate my “problem” with Economics as a subject: it describes perfect scenarios. In real life, things are rarely perfect, so economic models don’t always match up all that nicely with reality.
- Studying those discrepancies between economic theory and reality, I think, is where you really learn about the subject. If rational people seek to minimize loss, why the heck are people paying $4.59 a gallon when they could cross the street and save 20 cents a gallon, or drive less than a mile and save 59 cents a gallon?
- It’s also a good lead-in to a discussion about how cost isn’t everything, and how people value things differently.
It turns out that a few things are going on allowing them to charge this much, as I learned from the driver of our shuttle back to the airport.
The first is the simple fact that it’s located in the middle of a bunch of millionaires’ homes and apartments. If you’re driving your Mercedes from your $6 million condo to your country club in the suburbs, do you really care if gas is $4.59 or $3.99? (I would: I’m convinced that people who stay rich are the frugal ones.)
Further, it’s apparently a full-service station. You pull in and they fill up your tank for you. They probably wash your windows and say, “Good afternoon, Dr. Barlow” to you with a bit of a bow. (Assuming your name was Dr. Barlow, although I’d be hard-pressed to think of anyone by that name.)
But perhaps most interestingly of all? The shuttle driver mentioned that a lot of the customers are people driving company cars, or on business trips. In other words, they’re not paying. If your company is paying for your gas, do you care if it’s $4.59 or $3.99? If the line at the $4.59 place is shorter, you’re going there—the benefit to you is greater (a shorter wait), whereas the cost to you is the same (free!).
How many other people do you think had the same thoughts upon seeing these gas prices?