Near where I live, there are two small cities, Grand Haven and Muskegon, that are just a few miles apart. Drivers in both cities recently noticed an odd phenomenon — although the cities are right next to each other, gas prices in Grand Haven are several cents a gallon cheaper than they are in Muskegon.
This revelation led a prosecutor in Muskegon to begin an investigation of gas stations in that city for possible antitrust violations. On this view, the only possible explanation for the price difference is the probable illegal collusion between Muskegon gas station owners to artificially inflate prices.
Interviewed on a local television station, the prosecutor insisted his investigation was ongoing and may result in criminal proceedings. But a few second interview with a driver who delivers gasoline to both cities cleared up the mystery.
Unlike Muskegon, Grand Haven is a big tourist attraction with any gas stations. As a consequence, many gas stations there sell gasoline at a loss and recoup the difference on profits made from sales of the variety of products now stocked by gas stations.
Gas stations in Muskegon cannot afford to adopt this strategy, and as a result actually make a small profit (gasp) on gasoline sales.
To the prosecutor and motorists interviewed by the TV station, there must be some sort of nefarious plot to overcharge them for gasoline. But this was based on the false assumption that because they were in a similar geographical area that the gasoline markets in the two cities were identical.
A small example, perhaps, but a classic case of how people are lead astray in economic thinking through overly simplistic and often false assumptions.