Thursday, September 29, 2005

Logic, Schmogic

The following explanation is probably too logical and beyond the reach of those that whine about so-called 'gas gouging':

Recent events in the Gulf Coast have shocked our economy and have led to calls for re-examining our national emergency response systems. Among the calls to action is the enactment of price gouging laws, particularly as applied to gasoline. Such laws would be unnecessary at best and counterproductive at worst.

Price gouging laws reflect a basic misunderstanding of the role of prices in a market economy. Prices serve as a signal of the relative scarcity of a product. When a product like gasoline is in short supply due to, say, the disruption of production and distribution channels, then basic economics suggests that the price of gasoline will (and, indeed, should) rise. The higher price sends a signal to consumers that they should economize on their use of gasoline. Thus, consumers are encouraged to eliminate unnecessary trips, form carpools, drive more fuel efficient vehicles, and other ingenious responses. By doing so, consumers are doing their part to help allocate gasoline to those who place a higher value on the available gasoline, e.g., those engaged in the reconstruction effort in the Gulf Coast. Furthermore, a rising price will send the necessary signal to producers to expand their production in order to help alleviate the short supply.

If price is not allowed to rise to levels that equate supply and demand in the face of such disasters, then prolonged shortages are sure to follow. Is it better to have a smaller amount of gasoline available at artificially low prices or to have more gasoline available, albeit at higher prices? If the price system is not allowed to freely operate, then some other means of rationing will likely occur. For example, one would certainly expect long lines at gasoline stations to develop—reminiscent of the 1970s failed price controls on oil. How much are we willing to pay by wasting our time in such lines?

It is often argued that gasoline stations that charge extraordinarily high prices after disasters are mere profiteers, looking to make an extra buck in an unfortunate situation. If a rogue gasoline station does charge such high prices, then we are always free to shop elsewhere. If enough people react similarly, then the offending station will receive the appropriate message. Furthermore, the offending station will have to consider the harm to their reputation for their opportunistic, short run, pricing behavior.

I do not presume to second-guess the wisdom of the market as some politicians and the editors of the Marietta Timeshave done by calling for the application of price gouging laws. No single person (particularly any politician) has any informational advantage over the dispersed knowledge of thousands of buyers and sellers as reflected in market prices. Anybody who thinks they can "beat the market" has succumbed to what F.A. Hayek has referred to as the fatal conceit.
From: Price Gouging and the Fatal Conceit

As has been suggested before, those that are predisposed to whinning can channel their energies (pun intended) constructively...invest in energy stocks, put up a solar panel, trade-in your big SUV for a hybrid, keep your tires properly inflated for better fuel economy, form a cooperative to buy a gas station... apply that good o'le American 'Can Do' attitude.

Just don't wallow in self-pity over rising gas prices.

Update: Hurricane Evacuation Lesson: Don't Assume You're Being 'Gouged' by Walter Williams

Hat Tip: Cleveland Townhall


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