Extraordinarily long lines at the region’s gas stations are an inevitable consequence of government policy. But contrary to what many believe, it is not because politicians have not done enough. It is because they have done too much. Laws that prohibit “price gouging” rest on the assumption that both the available supply of a product and an individual’s “need” for that product is static, or fixed. This is false. The levels of both supply and demand respond to economic signals in the form of prices. When prices are capped, as they are in this case, shortages result. Let’s demonstrate this with a few examples.
If an individual makes plans when they believe gas is $3.50 per gallon, these plans will likely change if they arrive at the station and gas has risen to $10 per gallon. What seemed like a necessity at a lower price is now reconsidered. Perhaps they will realize they do not “need” to travel as much as they planned under different circumstances. It was never a “need.” It was a desire. This leaves more gas for the other people in line.
Now let’s consider the supply side. When the price of a product rises in a given area, this is a signal to the market that more of this product is desired. The opportunity for substantial profits creates an incentive to bring more of the product into the area. There is no question that the usual supply routes have been disturbed by the hurricane, severely limiting the passage of tankers. However, this situation is not static. There are other supply options that are not being exploited because they are not profitable. They are not profitable because the price is not allowed to rise to meet the new circumstances. Here’s the best part: when the new supply of gasoline comes into the area, it exerts downward force on the price level, bring the prices closer to the pre-hurricane prices.
There are two chief driving forces behind anti-price-gouging laws: the political incentive to exploit the discomfort of constituents and a social distrust of markets. The political side is widely acknowledged. The distrust in markets is rooted in a misunderstanding of them. Putting our trust in businessmen is foolish and unnecessary. It is the market’s competitive forces and the businessman’s desire to seek profit that puts serving us in their best interest.
Stephen T. McErleane