Resource Allocation under the COWPS Price Guideline: The Case of Fixed Proportions

摘要

Gasoline shortages returned to the United States for the second time in a decade during the spring of 1979. While many persons believed that US Department of Energy (DOE) refinery controls had caused those shortages, significant evidence emerged to refute this explanation. Shortages also prevailed in products not controlled by DOE, and DOE-administered gasoline price controls did not constrain most refiners' prices throughout the period of the shortages. Thus the authors of the present report turned to the price guidelines administered by the Council on Wage and Price Stability (COWPS) as an alternative explanation for the shortages. This report develops the theory of a profit-maximizing firm constrained by COWPS price guidelines. The nature of COWPS guidelines for refiners changed several times during the period of the shortages. The authors provide here a general formulation of such controls which encompasses all of the actual variants employed by COWPS. It is primarily an exposition of economic theory. Empirical evidence surrounding these events is discussed in a companion Rand report by Charles E. Phelps, Frank Camm, and P.J.E. Stan, Petroleum Product Shortages, 1979-1980, R-2766-RC (forthcoming). These results should be of interest to those agencies and individuals concerned with US energy policy and the causes of the 1979-1980 petroleum shortages. The results should also interest those concerned with theories of the regulation of business, those studying prices and price controls, and those analyzing aggregate data on prices through time periods in US economic history that include similar price controls. 10 refs., 7 figs. (ERA citation 10:036101)