Government Should Not Be in the Business of Preventing Price Gouging
There was an engaging discussion on the appropriateness of government intervention in price regulation in the comments section of a recent post of mine. Commenter D. Amiri wrote:
In the example of gasoline, which I do believe is unique, the demand could be high due to events not directly related to the price of gas, such as 9/11. Many bought gasoline on that day or the day after for fear that prices would rise in the future. What happened, however, is that some gas stations took advantage of the increased demand and jacked up their prices. […]
But gasoline is unique for many reasons: (a) demand is usually very high and relatively constant/predictable (b) practically speaking, one can only buy so much gasoline at one time (c) gasoline is a dangerous substance (d) gasoline is absolutely vital to the national economy (e) gasoline is product derived from an internationally traded commodity at which level prices already reflect speculation of higher/lower demand and supply.
None of these reasons is call for government intervention in gasoline markets. When the government intervenes in the market for a good by controlling the price, it causes artificial shortages and surpluses, and it also obstructs resources from being put to their highest use. Overall welfare is maximized when prices are allowed to represent relative values accurately.
- If the level of demand is high and constant already, then why should the government focus on protecting it from volatility? Price “gouging” is simply a misleading term for supply and demand. By increasing their prices in response to higher demand, gas station owners are simply capturing excess consumer surplus.
- All resources are scarce and finite. This is not an attribute that is unique to gasoline.
- The role of government doesn’t entail protecting individuals from products that they consume voluntarily. Practically every activity or product can be potentially harmful — smoking cigarettes, consuming raw milk, crossing the street — and individuals weigh the risks against their associated benefits. There is a risk that the gas station will ignite when I am filling my car with gas, but if I don’t fill it up, I can’t easily get places.
- Gasoline may be an important source of energy in the status quo, but substitutes exist (e.g., electricity, ethanol, geothermal, etc.). If the price of gasoline increases in the future, this will provide an incentive for entrepreneurs to seek other substitutes and to improve relevant processes.
- This is another attribute that is not unique to gasoline. A considerable percentage of the goods and services that people consume are internationally traded. Should the federal government protect the price of bananas or wine from volatility? It would not be feasible for the federal government to regulate prices in all of these markets.
Prices coordinate individual action efficiently by communicating relative scarcities and preferences, as I have discussed previously. However, government officials knock the price system out of equilibrium whenever they decide to subsidize or restrict an economic activity. When the government knocks the price of a good or service out of equilibrium, it results in a misallocation of resources. In other words, resources no longer go toward their highest use.
Changes in price are important for allocating scarce resources. This is why the price for plywood increases during hurricanes — individuals living in disaster-ridden areas have a higher demand for plywood than, say, a person building a treehouse elsewhere in the country. Because the former individual has a more critical need for the resource, he or she is willing to pay more for it. Those who think that the price has grown too high will refrain from buying the product, which leaves more available to be purchased by those with a higher willingness to buy. In the absence of externalities, a sudden rise in price levels does not represent market failure, so even theoretical economic rationales for government intervention don’t apply.