High Gas Price Control

The Reason the Price of Gasoline Has That 9/10

Apr 19, 2014 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic History, Government, Households, Labor, Lifestyle, Macroeconomic Measurement, Regulation, Thinking Economically • 286 Views    No Comments

If you asked me how much I pay for gas, I would say $3.49 a gallon.

Actually, though, the sign says $3.499. And that means, because the gas station rounds up, I am paying $3.50.  Doesn’t $3.50 sounds like a lot more?

The 9/10 of a cent story begins in 1932 with the Federal Revenue Act. The Great Depression had just begun, government revenue was down and President Hoover worried about balancing the budget. The revenue bill he signed included excise taxes on gasoline, chewing gum, soft drinks, matches and telegrams.

In 1932, the new federal gas tax was a penny per gallon. A .5 cent increase the next year was actually a large amount because gas was close to 20 cents a gallon (equal to $3.45 today at the BLS Inflation Calculator). With layoffs multiplying and unemployment close to 25%, 1.5 cents or 7.5% extra is a lot. Aware of how consumers would respond, retailers sought to minimize the increase by using decimals. Then and now, 21.5 cents a gallon sounds much less than 22 cents.

Subsequently, the excise tax on gas slowly ascended to 2 cents in 1951, 3 cents in 1956, 9 cents in 1983, 9.1 cents in 1986, 14.1 cents in 1990 and finally to 18.4 cents in 1993, its current amount. Meanwhile, it took until the 1970s for gasoline decimal pricing to gravitate to a constant 9/10.

That tiny 9/10 of a cent has made a big difference to retailers. During 2006, the bottom line of a Palo Alto, California retailer suffered when he switched to full-cent pricing. Posting $2.99 rather than $2.999, his customers assumed he was rounding up. Meanwhile on the 2500 gallons he sold daily, he was losing $23.00 in profits. Multiply that by 300 days or so and you get $7000. Soon, he was back to fractional pricing.

Gasoline prices are a perfect example of how we are thinking at the margin on the demand and supply sides. Even a tiny 9/10 of a penny extra can have a big impact.

And finally, I found it interesting that most articles said retailers rounded up the fractional price per gallon. However, the explanation I read from the Association for Convenience & Fuel Retailing said that the total was either rounded up or down, not each individual gallon.

Sources and Resources: Just having subscribed to Dan Lewis’s Now I Know, and reading his post on gasoline prices, I started looking further at that 9/10 of a cent and discovered some fascinating explanations and history, here and here.

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