Price 'Gouging' Again

Staff writers at the Independent Record, Helena, MT, USA, compile thoughts on gasoline ‘price gouging’ following Katrina (21 September 2005).

They report that some people were surprised to hear President George Bush was among the politicians warning against ‘price gouging’. They comment:

“But, despite the president's capitalist credentials, they shouldn't have been surprised. Bush is a politician, and responding to constituents' concerns is what politicians in a democracy do. … Voters may not fully understand the mechanics of fuel pricing, but they know when they smell a rat.”

This is an example of the economic illiteracy discussed in the previous post, evidenced by the comment they make next, with its gratuitous mocking of Adam Smith ('deity' indeed) and the usual rubbish about the invisible hand:

“Well, people less than convinced of the deity of Adam Smith and the "invisible hand" of his ideal market might agree with this basic lesson in economics 101, but that doesn't prevent them from noting that one whole heck of a lot of money is going somewhere real fast. It's not necessarily going to the guy who runs the gas station on the corner — his profit margins probably haven't changed much at all — but somebody is making out just fine.”

The point of gasoline prices going up rapidly is to deter, if not eliminate, people buying gasoline at the old lower price and to drive some of the quantity demanded off the market temporarily until the impending or actual shortage eases. True, you could achieve this several other ways, though none of them is as efficient as letting prices rise.

You could appoint special deputies to attend each garage forecourt and interview the car owners to decide (on some specified criteria) just who should be allowed to fill-up at the pumps. This might take some time to a) specify the criteria to meet the community’s priorities; b) argue it through with those disappointed at not meeting the criteria, and c) have law officers present to arrest those who refuse to leave without gas/petrol and to deter attacks on the deputies.

You could leave prices as they were – ban any price rises – and allow people to fill up (from an orderly queue? – who enforces it?) until the garage empties of gasoline, as it surely will speedily from panic buyers led by rumours. Then nobody else would have access to gasoline no matter what their need or their willingness to pay higher prices, no matter how high they might have gone.

Of course, it is possible that owners of garages would close-up their premises and go home, on grounds that the aggravation of dealing with angry drivers was not worth the hassle.

The staff writers concede these points:

“It's probably true that rising prices are slowing demand and thus preventing long lines at the pump.”

Their objection to prices rising appears to be concern about who is gaining from the price hikes:

“But we're paying mightily for the privilege of a quick fill-up.”

The gasoline companies make windfall profits in the short run (so does the government from gasoline taxes, normally proportional to the price per gallon/litre). That is the ‘price’ we pay for having the market constrain the quantity demanded; the purpose is to eliminate the queues of those who do not want to pay, or cannot pay, a higher price and who can make do with what they have in their tanks or who can make other arrangements during the shortage.

Proposals for windfall taxes of the oil companies won't do anything for the owners of cars paying more for their mobility. Others advocate the government should cut its tax on gasoline and reduce prices. Well, no faster way to empty the garages of gasoline could be devised - then a pending shortage would become and actual one within hours.

“Maybe it isn't quite right to call current pump prices "gouging," … but it won't hurt a bit to have state attorneys general and other elected officials investigate the matter. In a democracy, that's what those officials do.”

Sure. Have an investigation, afterwards. Perhaps a public inquiry. But for now, during the early hours of the shortage, let markets do their work, quickly, efficiently and without fuss. That’s what markets do.