The incentives associated with an anticipated fuel price change

In my ECONS102 class today, we discussed incentives. Broadly, incentives for decision-makers to change their behaviour arise when there is a change in the costs and/or benefits of the alternatives that they could choose. When the costs of something go up, we tend to do less of it. When the costs of something go down, we tend to do more of it. The reverse is true of benefits.

As a recent example, consider this article from the New Zealand Herald from a couple of weeks ago:

Massive queues are forming outside Auckland petrol stations as motorists try to take advantage of the last days of cheaper petrol.

The price per litre will jump around 29 cents from Saturday, when Government subsidies on petrol excise duty and road user charges end.

After June 30, the 25 cents per litre discount on petrol will be added at the pump - by the time GST is added the reinstated tax will add nearly 29 cents to the litre price.

When the price of petrol went up on 1 July this year, it created an incentive for people to consume less petrol. However, in the days leading up to the change in price, there was an incentive for consumers to fill up their car (and other available containers) before the price increase. And that's what many did.

But, is it worthwhile for consumers to queue for the cheaper fuel, when it may entail a long time spent waiting? That depends on the costs and benefits of waiting, which depend in turn on how big the price change was, how much the consumers were going to save, and how long they had to wait.

Let's consider a car like mine (a Nissan Altima), with a 60-litre petrol tank. Let's say the tank isn't completely empty, so the petrol consumer is filling it with 50 litres of petrol. If the cost saving is 29 cents per litre (from the article), the total cost saving for filling the petrol tank is $14.50. That is the benefit of waiting in the queue for cheaper fuel.

What is the cost of waiting? That depends on the opportunity cost of the consumer's time - what they give up for each minute spent waiting. As a simple way of measuring this, let's take the minimum wage as a starting point. At the minimum wage (currently $22.70 per hour), each minute spent waiting has a cost of 38 cents. That means that if the consumer waits 39 minutes or more for fuel, the costs of waiting (39/60 x $22.70 = $14.75) would exceed the benefits (of $14.50). Or, if we take the after-tax minimum wage (of about $18.72 per hour), then if the consumer waits more than 46 minutes for fuel, the costs of waiting (46/60 x $18.72 = $14.66) would exceed the benefits. And, for consumers whose opportunity cost is higher than the minimum wage, the number of minutes spent waiting before the costs exceed the benefits would be even lower. For example, the Prime Minister (with a salary of $471,000, or about $24.33 per minute after tax) would only be able to wait about 35 seconds for fuel before the costs exceeded the benefits.

Incentives really matter, and they are determined by the costs and the benefits of the alternatives we might choose. And when we think about the costs and benefits, we need to also consider the opportunity costs. Queueing for cheap petrol isn't necessarily a good idea for everyone.