Peter J Wilcoxen > PAI 300 Economics for Policy Analysis

D25: Evaluating a Gas Price Ceiling

Suppose hackers carry out a ransomware attack that shuts down a major gasoline pipeline (similar to what happened to the Colonial Pipeline a few years ago). The attack causes the price of gas to rise to $8 per gallon and the quantity of gas to drop from its normal level to 1 million gallons. The government is concerned about the high price and is considering imposing a price ceiling of $4 per gallon.

Use the spreadsheet in Teams to analyze the impact of the price ceiling. The elasticity of demand for gasoline is believed to be -0.2 and the elasticity of supply is believed to be 0.4, which will be the central case for the analysis. However, the government would also like a sensitivity analysis to show how the results would change if the elasticities were actually higher or lower than the central case: those are the "Low D", "Low S", "High S" and "High D" cases.

Here's what to do to complete the analysis:

  1. Some of the cells are already filled in and don't need to be changed: the initial conditions, the proposed price, and the elasticities for the 5 cases.
  2. Fill in appropriate formulas near the top for the change in the price (`\Delta P`) and the percent change in the price (%`\Delta P`).
  3. Fill in the "Central" column with appropriate formulas. The last one, "%PS to gas keepers" should be the CS gained by people who buy gas when the price control is in effect divided by the PS lost by the sellers. As before, it shows how effective the policy is at transferring wealth, but this time from sellers to buyers.
  4. Then copy the central formulas to the other columns. If all has gone well in setting up the central column, this should be just a matter of copying and pasting the formulas.
  5. Add a bar graph showing the %`\Delta Q` for each of the cases. Adjust the X axis labels to be "high" (above the bars) and add data labels so the percentages show below the ends of the bars. Set the title to "Impact on Quantity".
  6. Add a second bar graph showing the impact on SS for each case. Set it up in a similar way to the first graph but set the title to "Impact on SS".
  7. Answer the questions at the bottom.

Save and submit the results.

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    Peter J Wilcoxen, The Maxwell School, Syracuse University
    Revised 03/05/2024