Question

The state legislature mandates a price floor for gasoline of P_F per gallon. Assess the following statements and illustrate your answer using the figure provided.

1. Proponents of the law claim it will increase the income of gas station owners. Opponents claim it will hurt gas station owners because they will lose customers.
2. Proponents claim consumers will be better off because gas stations will provide better service. Opponents claim consumers will be generally worse off because they prefer to buy gas at cheaper prices.
3. Proponents claim that they are helping gas station owners without hurting anyone else. Opponents claim that consumers are hurt and will end up doing things like buying gas in a nearby state or on the black market.

Short answer

1. Both proponents and opponents are correct.
2. Both proponents and opponents are correct.
3. Proponents are wrong, and opponents are correct.

Step-by-step solution

Explanation for part (a)

The gas owner who sells at the regulated price will gain from the sales operation. But the gas owner who sells at the equilibrium price will lose as they could not earn more revenue. The movement from point E to A shows the fall in demand at the regulated price. Hence, both proponents and opponents are correct.

Explanation for part (b)

Yes, the proponents are correct; if the consumer pays higher than the equilibrium price, those consumers will receive better service; hence, the gas owner competes over quality rather than price. The opponents are also correct as the consumer paying the mandated price would be satisfied by paying the equilibrium price; thus, they are worse off. The movement from point E to A shows the fall in demand at the regulated price.

Explanation for part (c)

Proponents are incorrect as the consumer is worse off by paying more than the equilibrium price. The opponents are correct as price floor will waste resources as consumers who travel to other states waste their time. The floor price also leads to black marketing as the consumer requires quantity above the corresponding quantity at point A. Both consumer and gas owners will indulge in black marketing.