Monday, April 11, 2011

Free markets and efficient allocation

I've got to apologize for such a long blogging hiatus! It's been difficult to keep up with schoolwork and write, especially since writing about economics without a PhD and a Nobel Prize can sometimes make me feel like a bit of a fraud. To that end, please read the following disclaimer pertaining to all my posts, past, present and future:

Economics is freaking complicated. Sometimes people who think they know what they're taking about actually know nothing. And I am no exception.

Moving on. As I passed by a gas station on my way home today, I noticed a pretty sweet economics lesson in progress. The Red Sox had a home game, and a gas station near Fenway had converted into a parking garage in lieu of selling any gasoline.

This is interesting because the gas station's profit motive has led to the most efficient use of property; despite the fact that their pumps are full and ready to spew $3/gallon liquid gold into SUVs completely devoid of necessity in an urban setting, the owners saw the opportunity to make more money by selling parking spots to baseball fans (in SUVs completely devoid of necessity in an urban setting). That is, the station's owners saw that the opportunity cost of operating a gas station today was parking revenue and that it was worth more to convert their place for the day.

It's pretty telling how flexibility and "greed" lead to optimal allocation of resources. When shop owners see an opportunity for profit (which, in economic terms, includes opportunity cost and is therefore different from accounting profit), they change tacks. Since on aggregate people are willing to pay more for the new use of the property, we call this efficient -- consumers and producers get the highest net benefit through price signals. It's part of the invisible hand that Adam Smith talked about during the birth of modern economics: left to their own devices, participants in competitive markets will allocate resources efficiently.

Tomorrow, the gas station will be a gas station again, fulfilling its destiny as the most efficient use of land for that particular moment.