Tuesday, October 7, 2014

Lower gas prices and higher consumer welfare for the win.

I read the following passage at Carpe Diem (emphasis mine):
According to the Department of Energy, Americans buy 365 million gallons of gasoline every day, so every one cent drop in prices at the pump saves consumers $3.65 million per day, and $1.33 billion dollars over a year. Therefore, the 42 cent drop in prices since April will save US consumers almost $56 billion over the next year compared to what they would have paid if gas remained at $3.70 per gallon.
Think of an increase or decrease in the price of a good (or service) as a transfer of purchasing power from producer to consumer and vice versa.

When the price of something that is effectively a fixed "need" in the short term (gasoline, some food items, a utility bill, etc) changes is has a large impact on our individual welfare and consumption possibilities for other goods/servics that are more "luxuries" (by way of a very lenient definition) to us.

Those saved dollars from lower gas prices might not be explicit to us but they do appear elsewhere in the bundle of goods/services we consume on a regular basis.

I would think a good portion of that $56 billion shows up in retail spending such as food away from home, entertainment, and whatever you might buy at the Mall/Walmart after you fill up the tank.

In terms of GDP it is a wash.  Either the fuel companies get the money or you do and in turn other businesses get it when you spend it.

However, in terms of our standard of living, individually we are better off because we get to purchase other stuff with the extra money from lower gasoline prices.

This "surplus" welfare for consumers is not captured in the GDP accounting.

However, it is captured in my heart.  I LOVE MY SURPLUS!
View My Stats