Laws Against "Price Gouging" Aren't Helpful
Last week on September 9th, a gas pipeline in Alabama began leaking, significantly shrinking the supply of gasoline in the Southeast, including the state of Georgia. This pipeline alone is estimated to supply the East Coast with up to 40 percent of its gasoline. Pipeline volume has still not returned to normal, although normal levels are said to return “fairly soon.”
On the 19th of September, Georgia governor Nathan Deal issued an executive order reinstating Georgia’s anti-price gouging law in lieu of the sudden gas shortage facing the state and the rest of the Southeast. This is a move that is surely to be cheered by Georgia citizens as an act of protection by their benevolent governor. But alas, this decision should not be praised, for it is an apparent indication that Governor Deal was asleep during his Principles of Microeconomics class.
Don't Restrict the Pricing Mechanism
Prices act as a rationing mechanism. The state of mankind is one of infinite wants coupled with finite resources. The task of economics, then, is to figure out what is to be produced with our scarce resources. It is through prices that the resources we have get put to their highest-valued use in the economy. In order for this allocation to work, however, prices must be allowed to fluctuate freely. Let us look at an example.
Let’s imagine that there is a large forest fire, wiping out a large portion of the supply of wood. As a result, the supply of wood has drastically decreased (in a way similar to the gas situation affecting Georgia presently). This decrease in supply would raise woods price, causing a reallocation of wood throughout the economy. Since it would now cost more to use wood for production, only those uses where the producers viewed the raised price as still worth it would continue to use it. Those who decided that using wood was no longer viable would simply alter their business model. Wood would still continue to be used in, say, housing construction, but it would be used in fewer amounts for the construction of less-needed goods like bird houses. In other words, this price increase would shift the remaining wood supply to its most-valued ends in the economy.
The case of gasoline in Georgia is no different than our hypothetical example. Those Georgia residents who still view the gasoline as worth it — those who value gas the highest — will still continue to use it, while those who don’t have as high of a demand for gasoline will seek alternatives. The 40-year-old man who needs gasoline to get to work to provide for his family will continue to purchase gasoline, while the 17-year-old teenager will perhaps opt to take the bus to work instead. With gasoline being in smaller supply, the rise in price would allocate what is remaining most efficiently.
A Disincentive to Supply Gas
Unfortunately, the government rarely allows the market to rectify supply shortages. Case in point: Georgia’s anti-price gouging legislation. By putting a maximum price on gas, Governor Deal has rendered the market’s allocation abilities impossible. By putting a price ceiling on the price of gas, the 17-year-old will not amend his consumption preferences and will still choose to use the limited gasoline available, distorting the allocation of the scarce gas. Instead of having a high price to eliminate those who value gasoline the least from consumption, the price is now below equilibrium, and what precious gasoline is left is used in a less-efficient manner. Prohibiting the gasoline market to reach equilibrium will necessarily cause a shortage, as demand will far exceed supply, as can be seen in the graph below.
This price ceiling also exacerbates the less-than-ideal gasoline situation in another way. Supply curves slope upward. The higher the price, the more people will enter the market in search of the high profits. Seeing as Georgia is in dire need of gas, a high price would motivate more suppliers to enter the market. By increasing the supply of gasoline as a result of the high prices, the market would be refilled with much needed gasoline, and by consequence, the price of gasoline would be pushed back down as a result of the increased supply. Thanks to Georgia’s price ceiling legislation, however, it will be much more difficult to ever remedy the supply shortage. After all, why would any businessman enter a market where there is little prospect of making a profit?
Anti-price gouging laws distort the market in ways that are far from ideal or beneficial. According to Governor Deal’s executive order, he reinstituted Georgia’s price gouging prohibition because it is “detrimental to the social and economic welfare of the citizens of Georgia.” He continued stating that this prohibition is necessary in order “to protect public health, safety, and welfare...” What is being ignored, sadly, is basic economics. What would actually be in the best interest of the “economic welfare” of Georgia’s citizens would be to allow the price of gasoline to rise so that the limited supply remaining gets allocated most efficiently. While allowing the small amount of gas remaining to be used most efficiently, the higher price would serve as an incentive for more suppliers to enter the Georgia gas market, giving the state the gas it so desperately needs. But once again, in the name of the “general welfare,” the government has decided to interfere with the market, which will instead lower the welfare of its citizens. Politicians cannot and should not ignore the laws of economics. If they only bothered to read these laws, they would know unequivocally that the market is best when it is left undisturbed.