Friday, April 18, 2008

I Am Not An Economist But...

Doesn't it strike you that there is something very wrong with this quote from Dean Baker on what is wrong with McCain's tax free gas proposal:

Of course, we know that the price is determined by demand, because supply is constrained by the refinery capacity of Exxon and the other big oil companies.In other words, there is a fixed amount of supply, so the price will go as high as is necessary to eliminate any shortages.

The elevation of price doesn't, in fact, "eliminate any shortages" it may, long term, bring more product onto the market (or it may not if war and shortages of actual unrefined crude interrupt supply) but the one thing it won't do is "eliminate shortages." A rise in price means that *fewer people can afford* oil/gas and they will cut back on consumption thus *experiencing shortages* while wealthier buyers will continue to experience no shortages at a higher cost.

McCain's proposal, besides being absurdly beside the point since he's not yet in a position to get his horse declared a god, is wrongheaded on a number of levels. But raising or lowering the total price of the oil doesn't, in fact, eliminate shortages as such. Just, perhaps, shortages for some people.

h/t Obsidian Wings