In 1981, a Boston-based gas station owner set the highest gasoline prices in the nation. During that summer, he charged $1.69 per gallon for unleaded gas during the daytime and $2.59 per gallon at night, when other downtown gas stations were closed. (His all-time high price was $3.99.) Even at these extreme prices, however, the station owner sold an average of 3,000 gallons per week, half of this at night. Despite catcalls, pickets, and even vandalism from angry motorists during the gasoline crisis, the owner "stuck by his pumps"; he even charged $1 for air. As he put it, "People think of gas stations as public mammary glands, but they're wrong. This is a business and it's important to generate profits from every part of it. If I can use a resource, like air, to pay for the electric bill, so much the better. If you allow capitalism in its true form, it works beautifully. 2 pages
- Would you identify his actions as price gouging or was the station owner an avowed profit maximizer? Why? Why not? Explain.
- Identify and explain his pricing policy.
- Why his competitors did not participate in such action?
2: Market failure describes a situation in which the allocation of goods and services by free market is not "efficient" implying that a market participant can be made better-off without making someone else worse-off (i.e., Pareto optimality). Market failures are often associated with (1) public goods; (2) information asymmetries; (3) non-competitive market structures (monopoly, oligopoly and monopolistic competition) and (4) externalities. The existence of a market failure is used as a justification for government involvement in the operation of free market economy.
Write a short essay, using the market failure analysis, to justify why the U.S. government should or should not be involved in the provision of (1) airport security and (2) medical care.
Please review "Universal health insurance is a common good" published by The Economist in Oct 8th 2009.