Wednesday, June 07, 2006

More on Self-Serve Gas

Here we go again. The Social Econ blog continues our discussion of laws that restrict gas stations to be full-serve. To recap:
  1. Social Econ Blog (+ comments)
  2. Here
  3. Social Econ Blog
From the most recent reply:
They essentially assume that because producers are better off, the market (and society) are better off.

This is silly. One of the first things we teach undergraduates in economics is that producers following their self-interest do not always produce the efficient market outcome.
That's not really the argument, but no argument here on the second point. The single biggest principle in economics is that what the market delivers is the best possible, in the absense of any market failures. We see that most gas stations in states that allow self-service are self-service. (Again, the only numbers I could find was that outside of NJ and OR, 93% of people use self-service.) So, if we think that this is not socially optimal, then what is the relevant market failure here?

Personally, I see no candidate market failure in this case. To the extent that self-control with respect to what you buy at convenience stores is the market failure, I've already said that I think that restricted gas-pumping choice is a sub-optimal way to deal with that problem. Reading the most recent post at the Social Econ blog, these are the candidates I see there:
  1. An agency problem (i.e. "b" is small in his model). This doesn't seem plausible to me, because those who pump gas are unlikely to have enough market power to demand a large share of the pie. This is basically a minimum-wage job and even the two to five cents a gallon premium for full-service gas adds up very quickly over a lot of gas sold.
  2. The gains to gas station owners from self-serve customers buying at a convenience store is just a transfer away from some other convenience store owner who doesn't sell gas. I disagree. It's not just a transfer; if people decide to buy at the gas station, it means either that (a) the gas station charges lower prices or (b) they don't, but consumers save time by shopping at one location only. Nothing is forcing them to do so.
Of course, it isn't truly a competitive marketplace, so there are some failures (fixed costs of entry, exclusive supply contracts, etc) in the market for gasoline. But, I really don't see any for how gas is supplied once stations have it. I won't go so far as to say that it is impossible that Oregon's and New Jersey's laws aren't socially optimal; anything is possible. However, I still fail to see any compelling argument that there is some significant and real market failure here that legislation needs to correct.

One other thing: to the extent that convenience stores were once a good idea because self-service stations make people go inside to pay so they buy other stuff implusively, that is less and less the case. There's no data I can get on it, but I'm sure that a very significant fraction of gas purchases now take place through electronic means at the pump, and therefore, there is less and less difference in the appeal of a convenience store at self- and full-service stations. If you pay electronically, you needn't go inside in either case. Of course, you do need to get out of your car to pump gas, so there's still some extra appeal, even if you pay electronically.

It's likely the case that neither of us will convince the other. But if anyone can convince me that either of those two possible market failures above are real and stronger than I think, or there's something else I'm missing, I'm happy to hear it.

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