Thursday, December 08, 2005

Anti-price gouging legislation

This may stir the pot, but it needs to be said: there should be no attempts to pass legislation related to price-gouging, specifically when it comes to gasoline. It's basic economics, and Dr. Walter E. Williams, the John M. Olin Distinguished Professor of Economics at George Mason University since 1980, explains why. Please read the article (it's not long). An excerpt follows:
With all the recent hype and demagoguery about gasoline price-gouging, maybe it's time to talk about the basics of exchange. First, what is exchange? Exchange occurs when an owner transfers property rights or title to that which is his.

Here's the essence of what transpires when I purchase a gallon of gasoline. In effect, I tell the retailer that I hold title to $3. He tells me that he holds title to a gallon of gas. I offer to transfer my title to $3 to him if he'll transfer his title to a gallon of gas to me. If this exchange occurs voluntarily, what can be said about the transaction?

One thing we know for sure is that the retailer was free to retain his ownership of the gallon of gas and I my ownership of $3. That being the case, why would we exchange? The only answer is that I perceived myself as better off giving up my $3 for the gallon of gas and likewise the retailer perceived himself as better off giving up his gas for the $3. Otherwise, why would we have exchanged?


Some might argue that there's unequal bargaining power between me and the gas retailer. That's nonsense! The retailer has the power to charge any price he wishes, but I have the power to decide how much I'll buy, including none, at that price. You say, "Gas is a necessity, and we're forced to buy it." That too is nonsense. If I voluntarily purchase the gas, I do so because I deem it better than my next best alternative. Of course, at a high enough price, I wouldn't deem it as such.
I'm no oil apologist, and I detest paying high gas prices as much as anyone (though thankfully, they're almost $1 lower than they were three months ago). However, nothing good happens when government monkeys with the economic machinery that function just fine with basic supply and demand, as seen:
Think back to the gasoline price controls during the 1970s. The price controls caused shortages. To deal with the shortages, restrictions were imposed on purchases. Then national highway speed limits were enacted. Then there were more calls for smaller and less crashworthy cars. With the recent gasoline supply shocks, we didn't experience the shortages, long lines and closed gas stations seen during the 1970s. Why? Prices were allowed to perform their allocative function -- get people to use less gas and get suppliers to supply more.
During hurricane season in FL, people run out to stock up on various supplies, including generators. FL has anti-price "gouging" laws, so once hurricanes come through, vendors don't sell many generators, because when they do sell what few they have, the generators are gone. It's just not possible (or, when it is possible, it's not worth it) for vendors to do so. Follow me here for a minute.

There was a case last year where Hurricane Jeanne came through my neck of the woods (as well as other parts of FL). An entrepreneurial individual in Alabama was going to max out his business credit cards to buy generators, rent some moving trucks, and get these generators down to FL where people needed them. However, he was notified that the price he wanted to charge for the generators would be "too high", according to state anti-gouging laws. So, he scrapped the idea.

Fortunately, he didn't buy anything, so he was out of nothing. Floridians, however, who would have been willing to pay for his generators were certainly out of something: generators! These laws may be passed by Republicans or Democrats who don't want to appear sympathetic to "gougers", but in the end, they have a socialistic effect: better that more people suffer equally (i.e. no generators for anyone) than for any number of them to have some. So tell me: just who benefited from no one having generators?

Look, folks, the market works. There was a convenience store owner in Miami who was charging $10 a bag for ice right after Hurricane Andrew hit in 1992. People complained, but he said "How bad do you want it?" People paid for it. However, once life had returned to normal, people boycotted his business as punishment for his greed. His business went under. The market, not anti-"gouging" laws, punished him. That, my friends, is how you deal with shortages.