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The Right to Set Your Own Price

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10/21/2005Christopher Westley

Jason McBride is a gasoline dealer from Aliceville, Alabama, who had the gall to charge $3.69 a gallon for regular grade gasoline at his gas station while his competitors were charging $2.49 to $2.79. Who did he think he was, anyway?

I don't know, but we do know what he is now. A criminal.

McBride was arrested last week for violating the Alabama Unconscionable Pricing Act. This is Alabama's "anti-gouging" law, and it makes criminals out of gas station owners who "generally charge a price which is 25 percent higher than the average price during the last 30 days prior to [a] declared emergency unless attributable to reasonable cost factors." Poor McBride raised his prices on August 31st, the day that Hurricane Katrina visited our state, and two days after Governor Bob Riley declared a state of emergency. Oops.

The economic idiocy of these laws has been the focus of much commentary in recent weeks. They hinder the price system's ability to send signals to consumers and producers. They promote the use of resources in ways that are wasteful. They allow politicians to score points on the economic illiteracy of the masses. In the midst of a disaster situation, they cause shortages, slow the recovery process, and extend suffering.

But there is another objection that, in my opinion, trumps all of these.

They also violate the property rights of owners of scarce resources, such as gasoline. The gas station owners, not public authorities, are the ones who risk their capital in order to satisfy customers. They are the ones who hire labor, set contracts with suppliers, and organize resources so as to provide goods to customers via voluntary exchange. They should be able to charge whatever prices they want.

That's why Jason McBride should have been able to charge $5.00 or more a gallon for gas if he wanted. Or he could have given it away for free. Or he could have stacked it up in one-gallon cans, placed a table cloth over it, and had a picnic. After all, it was his property.

It is not his property, however, when someone else, using the threat of force, tells him how he can use it. This weakens his property rights and increases the risk that results from owning property. When Alabama's governor or its attorney general threaten violence for charging what they consider to be an inappropriate price, they assume partial ownership of that property, regardless of who holds legal title.

This distinction is forgotten at great cost. Property rights must be established and respected in order to provide owners incentives to utilize property in ways that are socially optimal — those that don't incur market penalties, at least in the long run. If we believe in the Law of Demand, we can assume that McBride lost business when he raised the price he charged for gas that day, and that he received complaints from customers who purchased it and later found that it was available elsewhere at a much lower price.

If he in fact charged prices in marked excess to the supply and demand conditions he faced — factors that state officials have no way of knowing about — aren't the market penalties enough? Should making entrepreneurial error be illegal?

Not to condemn the condemning of price gouging. Does it even exist? After all, one person's adjustment to supply and demand conditions is another person's unconscionable price. And if it does exist, consumers penalize it all the time when they alter relative purchases or engage in time-honored market practices of voice and exit. What should be condemned, however, is public officials' right to condemn price gouging. In that case, irony and hubris abound.

Look at how much you are charged to get a driver's license renewed or, if you own a business, to pay the annual franchise fee in order to be allowed to operate legally. In my own city, voters rejected a 9-mill tax increase last spring, and the response has been a sharp increase in property taxes this fall. In my state, the governor proposed (and the voters soundly rejected) a $1.2 billion tax increase (just months after winning an election based on fiscal conservatism). At the federal level, the gouging occurs around April 15th of each year with the hope that voters in November will forget about the pain incurred. The feds are especially astute price gougers. They can also do it by inflating the currency.

So who's the real gouger? Jason McBride may be pondering this as he shells out money to stay out of jail, for the act of pricing his own property in ways that did not serve the interests of the state. But somehow, I do not feel safer knowing that he was nabbed. After all, many smarmy characters engage in price gouging. The problem is that most of them operate outside the market.


Contact Christopher Westley

Christopher Westley a professor of economics in the Lutgert College Business at Florida Gulf Coast University and an associated scholar at the Mises Institute.

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