INTERTEMPORAL RESOURCE-ALLOCATION - DISTRIBUTIVE ISSUES SURROUNDING GASOLINE PRICE HIKES

This paper shows that many people misinterpreted the gasoline price increases that followed Iraq's invasion of Kuwait in August 1990. Consumers expressed outrage when prices increased immediately even though a production shortfall did not materialize for several weeks. But by withholding output in the invasion's aftermath arbitragers (including oil companies) reallocated output intertemporally to make more available when it was needed most. The welfare consequences in general depend upon demand elasticities and their rate of change, but in this instance consumer surplus would probably have been maximized with a full and immediate price adjustment and oil companies profited from their restraint. Copyright © 1991, Wiley Blackwell. All rights reserved