Tuesday, June 14, 2011

Ontario NDP Cannot Violate Economic Laws

Ontario New Democratic Leader Andrea Horwath is promising to address the high cost of gasoline with weekly price caps. This is likely to play well with voters because it sounds like gas prices would be lower. But Ontario cannot really do much about the price of gasoline because it is set in the international marketplace.

Looking at the details of Horwath’s statements, the NDP isn’t really promising lower gas prices. What they are promising is reduced short-term volatility. Horwath says “the point is not to keep prices artificially low” but rather “to stop the oil industry from price gouging.” But most voters will surely see a promised end to “price gouging” as lower prices.

The truth is that forcing prices lower will result in shortages unless the government subsidizes our consumption of gasoline through reduced gasoline taxes or direct subsidy. The classic price-quantity curve of economics applies: if the price is lower than the equilibrium point, then demand will exceed supply leading to shortages.

Rather than complain endlessly about the inevitable climb of gasoline prices, Canadians need to embrace alternative energies. These alternatives are expensive now, but as we learn to exploit other energy sources more efficiently their prices will come down while oil prices continue to climb.


  1. Yeah that was pretty disappointing. The NDP has been a bit of a let-down so far, between this and their pandering to separatists.

    We ought to tell gas stations they can raise their prices whenever they like, but they can only lower them one week after raising them. That makes it risky to raise their price (in case the other guy doesn't) so they'll think twice about it.

  2. @Patrick: I don't like the idea of making up new laws just for gas stations. I think the focus should be on preventing any collusion.

  3. "pandering to separatists" ???

    I'd argue that statement, vehemently, but I don't think that's the point of this blog.

  4. @Paul: I think maybe we're mixing the NDP federally and provincially, but I agree that such political discussion is not the point of this blog.

  5. I recently changed the jets on my 750 cc motorcycle and I was extremely happy that it "only" consumes 4.3L/100 km. But the very next second I remembered my trip to Romania (where I am from) where I drove a rental - 1300cc, four-seats (quite comfortable), manual transmission... that also took 4.3-4.5L/100 km in combined driving. I went over high mountains, I was able to sustain 110-120 km/h, pass etc. and I still did more than 940 km on a normal gas tank. We should kick more in the auto industry that doesn't offer truly economical alternatives (they make me laugh with Ford Fiesta - "only" 6.9L).