There was a recent disruption in the supply of gasoline to Georgia due to a ruptured pipeline. The resulting shortage was the predictable result not of the constrained supply, but rather busybody price controls imposed by the Governor. The universal support by the public for the Governor’s actions betrays a breathtaking ignorance of basic economics. The law of supply and demand cares not one whit for your desire to maintain a constant supply of a good while forcing its price down.
Would you prefer a high price and an event ticket, or no ticket?Not only should “gouging” be “legal,” it should in fact be welcomed. Gouging ensures a supply of a good even when supplies are constrained. For example, gouging of event tickets ensures that you can get a ticket at a moment’s notice. Although the price is high, would you prefer high price and a ticket, or no ticket?
High Prices Economize
Rising prices due to increased demand is the market-natural rationing system. If prices stay low, then no one cuts back and the good is quickly consumed. High prices incentivize conservation so a given supply lasts longer and is available to those that desperately have a need of it.
Hypocritically, the state blocks private business from such practice, but happily engages in it on a regular basis in the PeachPass toll lanes of I-85. I have personally seen prices go from 7¢ to over $11 for the same stretch. Of course this is a good thing, and the state knows it, so it is rather disingenuous for them to block it in other arenas.
The most common objection is, what of the station that raises their prices during the day on the mere rumor of a disruption? They’ve already paid for the gas in the tanks in the ground – how can they possibly justify reaping these windfall gains? Easy. The higher price (and profit) ensures the station itself can buy more from their supplier at the soon-to-be higher prices.
If the gas in the ground cost 25 and is sold for 30, then the station takes from those sales 25 and buys the same amount again. But if they are not allowed to raise prices and it soon will cost 100 to refill the station’s tanks, then they can only buy 1/3 of what is needed and so will run out that much faster each time. If they can charge 120, they can take 100 and fully replenish the tanks, ensuring a steady supply.
High Prices Send Signals
The market will naturally correct itself. No need for men with guns.A tertiary benefit of high prices is an economic alarm. Where prices are high, it signals to society that resources are more urgently needed. People then swoop in to access that higher profit potential, and so the supply immediately begins to swell and prices fall. So even when such “gouging” occurs, it will not last long as the market corrects itself naturally. No need for men with guns running around threatening people.
The usual objection here is that people can’t afford the higher prices. Please. No one is going to be filing bankruptcy because they spent extra on gas for a week or so. The above-average amounts are no more than typical monthly discretionary spending (movies, eating out, etc.) The prospect of possibly foregoing a few luxuries doesn’t seem like the sort of essential human right that rises to a compelling state interest. Indeed, state intervention only makes matters worse – when it comes to economics, there’s no free lunch.
This first appeared at the author's blog.