Aug 12

The Government is Going to Pump You Up

The Government is Going to Pump You Up

J. A. Gedra

The citizens of Somerset Kentucky now have the opportunity to tell their Mayor to fill her up. According to news reports, “the city is purchasing fuel from a local refinery and pricing it 15 to 20 cents below what commercial stations are charging.” This sounds like a great idea, but should the citizens of Somerset be pumped up about their new government gas pumping station?

Like most government interventions into the business market, there will be a big benefit at the front end followed by weeping and the gnashing of teeth at the end. Initially, gas prices will drop as the city government offers gas at cutthroat prices. In order to retain their customers, all of the non-government gas stations will have to follow suit and drop their prices. This will result in everyone paying lower gas prices and the citizens will rejoice in triumph over the greedy gas gouging station owners.

Unfortunately when the government intervenes, the benefits are soon followed by the unintended consequences of their actions. Traditionally, privately owned gas stations’ profit margins range from 1 to 3% of sales. When gas costs $4 per gallon, the gas station’s profit is somewhere between 4 to 12 cents per gallon. If gas stations are forced by the city of Somerset to cut their cost by 15 to 20 cents, the gas stations would be losing money on every sale of gasoline. Overtime, this continued loss in revenue would eventually lead to all of the gas stations in Somerset going out of business. This would result in the gas company employees losing their jobs, and the city losing tax revenue from the companies going out of business.

The loss of all of the gas stations in town will force all of the Somerset citizens to purchase gas at the City Monopoly gas pump. Since the city is running the only gas pump in town, it will only be a matter of time before this government program, like almost all government programs, starts to go over budget. The city will also need to make up the lost taxes they are no longer receiving from all of the gas stations they drove out of town with their predatory pricing. At this point, the city will do what almost all government created monopolies do; they will increase their prices to make up for the lost tax dollars. Eventually, the city politicians will realize they could pay for their new pet projects by increasing the gas price just a little more. Once this starts, the price of gas will continue to increase until it matches or exceeds the price that people were paying before the government went into the gas market.

Government entering the private market with their own gas station is not the solution, but there are things the government could do to lower the cost of gas. The government could begin by lowering gas taxes; on average, 13% of the cost of gasoline is due to taxes. The city could also lower other taxes to decrease the cost of business for gas stations: such as, income, sales, payroll, property, electricity, water, and sewage taxes. Government could also reduce the regulations against small businesses, since every regulation adds to the cost of doing business. If government could decrease the tax and regulation burdens, gas stations could lower the cost of gas. A government takeover of an entire industry is not necessary to reduce the cost of gas. Less government, not more, is the solution.


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