Honest Merchants of Death
Unfortunately (and much to Conor’s consternation) I’ve never published the article I’ve had rattling around for almost a year now on gas-station economics. That means I can’t link to it now to defend the proposed DC subsidy for gas stations, which may not ultimately be a sensible idea but makes more sense when you look at how most urban gas stations actually make money. (I don’t know from DC gas stations in particular, but I’m assuming they follow these patterns.)
1) Selling gas. Franchisees buy gas from their parent companies, with gasoline tax already built into the cost, and generally sell it at a standard markup (say, 8 cents on the gallon). So owners aren’t responsible for high gas prices, but they feel the pinch anyway. Furthermore, when customers buy gas with their credit cards, that profit is further eroded by credit-card fees. These combine a per-transaction charge with a smaller per-gallon rate, meaning purchases have to exceed a certain quantity to be profitable for the gas station (rather than having profit eaten by the transaction cost). This threshold is fairly low — 15 to 20 dollars — but if gas is expensive, or money is tight, proprietors are far less likely to make money on the sale. Any increase in gas taxes, of course, pinches profits further.
2) Selling tobacco. Minimum prices are mandated by the government through taxes, and rose significantly this year when the State Children’s Health Insurance Program was authorized. But while most customers will buy tobacco somewhere regardless of price, there are a lot of somewheres, not all of which are locally-owned gas stations. The margin between minimum price and the highest competitive price dwindles, and so do profits.
3) Selling lottery tickets. Hugely popular in urban areas, but prices are set by the government (in DC’s case, the District of Columbia Lottery and Charitable Games Control Board), so profit margins can’t be adjusted to compensate for loss in other areas.
4) Selling food. High profit margins, low sales. (And continued public-health awareness campaigns certainly don’t increase the market for pork rinds and Mountain Dew.)
Of course, the reason these markets are so tightly regulated is to inhibit demand for these products, which generally cause social harm; it’s possible to say that a gas station’s profits rely on feeding the addictions of its customers. But franchise owners aren’t merchants of death; plenty of them are naturalized or first-generation immigrants with a little bit of entrepreneurial capital and a lot of chutzpah, attracted to a business that used to be a lot more profitable than it is. They don’t necessarily delight in enabling addiction. I’ve seen one employee chide his regular customers for their smoking habits as he rang them up. (I know that’s anecdotal, but I don’t see any evidence at all being forwarded that gas station proprietors deserve to be indirectly penalized for the sinfulness of their wares.) If a gas-station subsidy makes sense — and I’m still not sure it does, mind you — it’s because it counteracts the penalties government is already exacting on people who don’t really deserve the punishment.
Perhaps I’m confused, but wouldn’t high gas prices tend to offset fixed per-purchase costs from credit-cards? High prices should mean larger purchases. Some folks won’t fill up a full tank (though they may still spend more money), but is it really enough people to make the difference?
— Justin · Mar 19, 09:53 PM · #
Did you get a sense of the % breakdown of sales and profit between 1-4 for gas stations above? You should write that article.
There’s nothing about a cigarette tax that is unique to gas stations, is there? Gas stations strike me as more stuck between large-scale enterprises – credit card companies with their fees, walmart with its bulk sales of cigarettes on the cheap – than smacked around by the regulators (lottery tickets aside).
Would you support a repeal of the ban of selling cigarettes to minors at gas stations until the recession is over?
— Rortybomb · Mar 19, 10:05 PM · #
Justin: I agree with you that logically, gas consumption should be based on gallons, not dollars. But the customers I saw while reporting the article overwhelmingly did the opposite, buying “$15 on (pump) 5,” for example. This was last spring, when prices were unusually high, so some people might have changed habits as a stopgap measure, hoping that prices would drop in a few days so they could fill up. But that’s speculation on my part; it could just as easily be that their usual $20 gas outlays were just buying less gas.
Rortybomb: Franchise owners are most definitely “stuck between large-scale enterprises.” It’s just that dealing with that component of it is more complicated than allowing government to compensate for its own unintended consequences. Meanwhile, your proposal, while intriguing, seems to me that it would create a whole new set of unintended consequences: government would first have to regulate what counts as a “gas station,” whether “convenience stores” without pumps should be included, how many locations a franchise owner has to own before he’s too “large-scale” to be eligible, whether to allow Big Tobacco to publicize the change (and risk advertising to minors), etc. All in all, it doesn’t seem like a serious enough problem to change the legal regime on tobacco. (And sadly, I didn’t get hard data on revenue streams. Maybe when I’m unemployed and freelancing, as seems imminent, I’ll get back to the piece.)
— Dara Lind · Mar 19, 11:19 PM · #
“I don’t see any evidence at all being forwarded that gas station proprietors deserve to be indirectly penalized for the sinfulness of their wares.”
Neither do I, but in order to set up the incentives for good behavior optimally we have to levy taxes on lots of people who don’t deserve them in this sense. Which is a point that I think you halfway accept, but aren’t especially happy about. (I’m not overjoyed about it, but being an old-fashioned utilitarian, I think it’s a fact of life when we’re designing social policy.)
— Neil the Ethical Werewolf · Mar 23, 02:20 AM · #
“it’s because it counteracts the penalties government is already exacting on people who don’t really deserve the punishment”
An all too uncommon understanding of the world in which we live.
— Kyle · Mar 24, 12:14 AM · #