Taking Care of Some Economic Illusions

article top

It is time to take care of some misunderstandings about the economics of living in Hawaii and how recent actions by lawmakers will make Hawaii an even more difficult place to do business.

One of these illusions is that somehow lawmakers have the power to control the price of gasoline by adopting laws that dictate what the price of gasoline will be allowed to be.


Putting all the legal arguments aside and looking at what effect price control legislation will have on Hawaii is more critical at this point.

As experts have observed, the legislation is so poorly drafted that it will end up making sure that gasoline prices are even higher than they are currently.

Because the legislation controls only the price of regular fuel sold at self-serve pumps, the logical thing for gasoline dealers to do is to stop selling this type of fuel. If so, then drivers may find that their only choices will be the premium grades of gasoline, which will cost more anyway.

The legislation utilizes the price of fuel taken from select West Coast urban areas. Goodness knows what lawmakers were thinking when they added this provision.

Anyone who is awake knows that the cost of gasoline on the West Coast, especially in California with its strict emission standards, will be expensive just because of the added costs of making that superior of a product.

But those arguments aside, the most critical issue represented by the legislation that was approved last year is that it sets price controls on a product. This is why the Federal Trade Commission was so interested in following it and participated in the evaluation of the legislation.

Price controls had been tried once before at the federal level under the Nixon administration. Controls on rent have been applied in various cities around the country, most noticeably in New York. What we do know about price controls is that they do not work. They skew the supply of the product and cause people to circumvent the price controls in inefficient ways.

For example, in the case of rent controls, because landlords are not allowed to raise rents, fewer apartments are put into the rental pool shrinking the supply. Or if they do rent, they ask exorbitant rents to ensure that they are ahead of the game.

More importantly, imposing controls on this particular product sends a negative message to the world outside Hawaii that lawmakers are able to dictate what a business can charge for its products.

That being the case, then why should anyone want to do business in Hawaii? If it is gasoline today, why not milk or the price of meat? Imposing price controls is a huge neon sign that tells potential investors that they better not invest in Hawaii because they may not be able to charge what they want for the products or services they produce.

The same thing goes for the argument that we should force the two local airlines to lower their fares because it has gotten so expensive to fly between the islands. Again, this is a matter of economics.

In the “old” days before direct flights from the mainland and Asia, visitors were forced to use the two local airlines if they wanted to get from Honolulu to a Neighbor Island.

As a result, there were more bodies to fill an airplane and what seats visitors did not use, residents filled. Because the cost of taking a jet up in the air and to another island is the same whether all the seats are taken or not, more passengers mean that the cost is spread over a larger number of tickets. Thus, the cost could be kept low and even in some cases, the airlines could offer kamaaina a discounted rate because visitors paid the full fare.

Now that visitors can skip the interisland hop, there are fewer passengers over which to spread the cost of that interisland hop. The result is higher fares and fewer flights since it makes more sense to cut the number of flights and to fill each cabin to capacity instead of flying half full.

Both examples find the genesis of the problem in the basic economic principles of supply and demand.

In the case of gasoline, there are really only two suppliers of refined fuel. One that has been around a long time and has very little debt and the other rather recent with a tremendous debt load. The newer refiner basically sets the price because it has to recover the cost of production and its capital and debt expenses.

The other refiner pegs its price at the one the other refiner charges, but in this case the profit margin is larger because it does not have all the capital and debt expenses. Voila, high, uncompetitive gas prices.

In the case of the airlines, the drop in interisland traffic and fixed operating costs means higher fares for interisland travels. What is clear is that these high costs cannot be fixed with the wave of the magic legislative wand.

But what we do know is that the legislative wand just made Hawaii a less attractive place to do business.

”’Lowell L. Kalapa is the president of the Tax Foundation of Hawaii, a private, non-profit educational organization. For more information, please call 536-4587 or log on to”’ https://www.tfhawaii.org