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Price mechanisms at work, or not

Damon Chetson
June 27, 2007, 7:30am

Iranians are rioting over government plans to ration gasoline. It turns out that while Iran is one of the world's largest exporters of crude oil, it's also a major importer of refined gasoline, in large part because it lacks the refining capacity to turn oil into gas. Iran also heavily subsidizes its gasoline so that Iranians at the gas pump pay just 40 cents for a gallon (my quick conversion to the English system from the article's stated price of 11 cents per liter). Consequently, as I heard a reporter for the Independent explain on NPR yesterday, Iranians have one of the highest rates of gas consumption per capita in the world. Instead of raising prices to reflect the market, the Iranian government has decided to allow drivers 21 gallons a month (somewhat over 200 gallons for taxi cab drivers). It turns out that the price mechanism does affect incentives, whether you're in Chicago, Paris, or even Tehran. Artificially low prices cause overconsumption, shortages, and rationing. Go figure!


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