Price Gouging Is Good for Us

Published May 25, 2006

Apparently, you can’t be in politics today without crusading against price gouging.

Congress is working on legislation making it a crime. Attorneys general in many states are accusing gasoline dealers of “profiteering” from fuel supply uncertainties, and some are advancing proposals to inflict higher taxes on fuel producers. According to news reports, 29 states already have some legislation against price-gouging, and many states that do not are considering them.

Unfortunately, criminalizing or taxing “price gouging” would only worsen the problem.

Profiteering and price gouging are natural, useful responses to an imbalance between supply and demand. When demand outpaces supply, the value of a commodity rises. Those who possess the commodity will naturally ask a higher price from those who want it. Possessors of scarce goods see no reason why their acumen or good luck in having obtained these goods prior to the change in value should not benefit them.

It is also quite natural for those who neglected to obtain these goods prior to the change in prices to blame their misfortune on the “greed” of others. Nevertheless, the complainers in one instance may well be the profiteers in another.

For instance, over the past year the price of homes in many regions has risen substantially. Homeowners, the possessors of these highly valued goods, expect to benefit from this increase, though they have done nothing more than buy and possess assets. They stand to reap large rewards from those willing to pay them a higher price to transfer ownership.

The parallels are obvious. Housing is every bit as essential to a comfortable lifestyle as gasoline. Housing also takes a much bigger bite out of consumers’ budgets than does gasoline. Are the advocates of government action going to put forward tax increases on housing profiteers? Do we need a price gouging law to crackdown on these people?

No, because greedy profiteering is precisely what we need to help us get through a crisis. Higher prices discourage waste or frivolous use of the precious fuel in short supply. Higher prices encourage producers to try to increase the supply. Prices act to help bring about equilibrium between supply and demand.

Government interference with prices will encourage waste and discourage production. It was government interference with prices during the 1970s that led to the horrendous lines at gas stations, an incredible and costly waste of time.

High prices for gasoline will not be as damaging to the economy as the increased uncertainty of supply that would be created by punitive measures like taxes or price gouging laws. After all, gasoline is only a small portion of the cost of transportation. Adding a dollar to the price of a gallon of gasoline boosts the cost of travel by about four cents per mile. For a person traveling the average 12,000 miles a year, this amounts to an extra $1.30 a day. The average person spends far more than this on discretionary spending. It is not difficult–as millions of auto-travelers proved this Memorial Day weekend–to reallocate spending in order to afford the greater outlay on gasoline.

There are also ways to reduce one’s consumption of gasoline. One could reduce fuel costs by switching to a more fuel-efficient car, car pooling more often, or taking public transportation like buses and trains.

If government intervention in the marketplace were such a good idea, the Soviet Union wouldn’t have collapsed. The Soviet government’s efforts to ensure affordable prices for consumers led to chronic imbalances in supply and demand. The economy operated way below its potential and consumer needs were ill-served. We ought not to imitate (even on a limited, emergency basis) the misguided price control practices of the Soviet system.

John Semmens ([email protected]) is an economist with more than 30 years’ experience on transportation issues. He serves as a policy advisor to The Heartland Institute.