Question: Suppose the market price of gasoline is $5.00 per gallon. Politicians deal with their constituents who believe such prices are outrageous and impose price controls of $2.00 per gallon. At this price, I want to buy 9 gallons of gas per week, but gas stations now only sell 5 gallons a week. There is a shortage.
Assume you will have to wait in line to buy gas. Doing so will grant you the right to purchase gasoline at a controlled price of $2.00 per gallon. Also, assume you are willing to pay up to $6 per gallon. Finally, let’s assume that wages are $10 per hour.
How long do you wait in line to buy gasoline? What is your total gasoline spend every week? What is the price per gallon? Has price control reduced gasoline prices?
Solution: This question highlights the importance of considering not only the price of money, but also the opportunity cost of time.
With price control set at $2 per gallon and willing to pay up to $6 per gallon, the extra $4 per gallon reflects the value you accept in the wait time. Given a wage of $10 per hour, this translates to 4/10 = 0.44/10 = 0.4 hours, or 24 minutes per gallon. For 5 gallons, wait a total of 2 hours per week.
Your weekly total spending is combined:
Montary COSE: 5×2 = 105×2 = $10 Hour Cost: 2×10 = 202×10 = $20
So total spend = $30 per week.
If you break down five gallons you get the full price of 30/5 = 630/5 = $6 per gallon.
The nominal price fell from $5 to $2, but the wait cost went to $11, while the effective price rose to $6. So price management didn’t cut the real cost of gasoline – it actually raised it.
