Insurance Against Expensive Gas

With prices at the pump increasing, the calls for politicians to “Do Something” gets louder and more frequent, and one of the results is the McCain-Clinton proposal of the gas tax holiday. Economically it makes little sense, and it is unlikely that it would lower that cost of gas by more than a tiny amount. The most sensible endorsement I’ve seen is Bryan Caplan’s, who argue that the proposal, while not particularly good in itself, is better than the likely alternatives. He expects the other likely option to be price controls. After all, it is political suicide to “Do Nothing”.

As is often the case, the market has provided a better solution than choosing between two (or more) evils. The headline give it away: insurance. Stephen Levitt writes about it on the Freakonomics Blog.

I love Chrysler’s new incentive program that guarantees consumers who buy one of their new cars or trucks won’t pay more than $2.99 a gallon at the pump for the first three years they own the vehicle.

When you sign up, you get a special credit card that can only be used to buy gas. When you swipe it, $2.99 per gallon goes to you, the rest of the cost is paid by Chrysler. (There are some limits on how many gallons per year you can buy, whether you can use the premium grade gas, etc.)

Several commenters write that gas prices would have to rise to unlikely levels for this plan to make sense for the consumer. That might be true, dollar for dollar, but it’s beside the point. The plan is not intended to lower your costs; its goal is to make them more predictable, and that is what you’re paying for. This is no different than home insurance, or any other insurance.

Assuming that this type of insurance turns out to be a viable service, and a fairly stable market for it appears, it would be interesting to know whether Dr Caplan would change his mind on the gas tax holiday. In other words, will the availability of gas price insurance reduce the demand for political action?

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