South-Western College Publishing - Economics  
Defying historical lessons, Hawaii sets gasoline price caps...again!
Topic Equilibrium, Supply and Demand; Government and the Economy
Subject gas price cap set in Hawaii
Key Words price ceiling, gasoline, natural gas, Hawaii, Katrina, Rita, demand, supply.
News Story Responding to soaring gasoline and natural prices, the Hawaiian legislature has taken the "preventative" step of setting a cap on gasoline prices, effective 1 September. Over the last year, crude oil prices have increased 55%, and natural gas prices are up over 80% from last year.

Energy prices have been climbing due to soaring demand in the U.S., China and India, and supply bottlenecks globally have contributed to rising prices. Tropical Storms Katrina and Rita also caused considerable worries as they bore down on the Gulf Coast, where a significant percentage of US oil refiners are located-New Orleans and Galveston, Texas both have large refining capacity.

The average price of regular unleaded gasoline in Hawaii is $2.84, according to the American Automobile Association (AAA). Nationwide, the average price is $2.61. Hawaii intends to set a weekly cap based on an index of average wholesale prices in California, the Gulf Coast, and the East Coast.

Not surprisingly, the gasoline industry is opposed to such actions. According to Chevron's CEO, "Any steps to interfere with market forces have undesirable consequences." He has the support of Hawaii's governor, who is also opposed to government intervention in this market. Energy analysts have argued that such moves could actually make gasoline prices on the islands more expensive than they would have been without the caps.

The Hawaiian legislature argues, however, that "consumers have been price gouged for a very long time."

1. Assuming that the price ceiling on gasoline is set below the market equilibrium, what will be the effect in the market for gasoline in Hawaii? Illustrate your answer with a graph of supply and demand.
2. Absent the price ceiling in Hawaii, illustrate graphically with supply and demand curves what is happening globally in the market for gasoline.
3. What will happen to the price of gasoline if Katrina and Rita prove to be as devastating as anticipated? Illustrate your answer with a graph of supply and demand.
Source Russell Gold and Thaddeus Herrick. "Energy prices continue to surge as Hawaii sets cap on gasoline." The Wall Street Journal Online, 25 August 2005. A1+.

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