 Voices For Freedom Read Columns
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© 2006 Daniel J. McLaughlin Price Gouging In A Market Economy There are natural laws, including certain laws of economics, that you disregard at your own peril. Examples are the laws of supply and demand and prices. When people talk about price gouging, they are typically speaking from a misunderstanding or intentional distortion of the laws and the market. Prices serve multiple purposes. They are a measure of the value that consumers place on goods, they allow a producer to recover cost and earn a profit, but price is also a mechanism which forces buyers to limit what they buy. That is how the free market allocates scarce resources. As resources become more scarce, the price goes higher. Only those that value the product more are willing to buy. It has always worked that way. But, you might ask, how can it be good and necessary for the economy and consumers when sellers charge double or triple what they normally do when there is a time of crisis, such as a hurricane or war or crop failure? When prices for a certain item increase, people tend to buy less. If it is gasoline, they may take fewer trips to the shopping mall, they may car pool to work, etc. If it is hotel rooms, families might squeeze more people in a room instead of renting multiple rooms. If it is fresh water, they may drink less, wash less, produce their own by boiling and otherwise reduce their need to buy. By not buying that extra tank of gas, by not renting that extra room, by not using that extra gallon of water, they are saving that gas, that room, that water for someone else who may need it and value it more, but would not have gotten it at all. If prices are held at artificially low levels, people tend to recognize the bargain and consume more than normal, rather than less. This leads to shortages which can become critical. Those of us who are old enough can remember the gasoline price controls of the 1970’s. The most significant memories of that time are the cars lined up for blocks at the gas stations because there was little supply. As soon as price controls were lifted, the miracle of the market made the shortage evaporate immediately. Lines were gone in a few short days and things got back to normal. The normal incentives to produce and sell were put back in place. People in San Francisco face critical shortages of homes and apartments because of ill-advised rent controls and restrictions on supply. Housing shortages vanish when controls and restrictions are removed. The market reacts to the incentive to produce. You can’t break natural law, but you can break yourself, or your economy, on the law. Supply, demand and prices are in a natural balance. If artificial controls are applied to one, the others automatically and uncontrollably adjust. If prices are held to a level lower than the market price, whether by law or by coercion, the inevitable result will be a shortage, with long lines, incredible waste of time and resources, and angry people going without. This has been the complete and undeniable history of price controls, whenever, wherever and however they occur. Our federal and state governments, in trying to look like the savior of the “little guy”, are instead throwing us “little guys” against the laws of nature. The fines and penalties and windfall profits taxes for gasoline “price gouging” are, in reality, price controls in the form of coercion. Federal laws that set price caps are actually being proposed. It would be interesting to know if the law makers are just too young to remember, or pandering to an ignorant constituency or are truly malicious and want to hurt our economy and our citizens for their own gain. Whatever the reason, the results will be the same. We, the people, will pay the penalty in the long run, and their mischief will guarantee that there will be even less gasoline available for us “little guys” the next time a real crisis comes around
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Daniel Mclaughlin
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