Eric D. Dixon

Although Claire McCaskill has been a stellar example of fiscal responsibility so far in her battle against the congressional earmark process, a recent statement from the freshman senator about gas prices is worrying:

Missouri Sen. Claire McCaskill has joined with 12 other senators to propose bipartisan legislation to ban price gouging at the gas pump." Gas prices in Missouri are nearly $3.00 a gallon, so people are already feeling the pinch on the pocketbook," McCaskill, a Democrat, said in a statement. "Without strong laws banning price gouging, we will remain vulnerable to market manipulation and consumer exploitation in times of national emergencies, as we learned in the cases of 9-11 and Hurricane Katrina."

Every time gas prices rise, we hear the same litany of cries for protection from high prices — presumably stemming from the notion that a price is just an arbitrary number, set by whim, or the greed of the seller. Sure, it's possible that any one seller can set prices higher than found on the general market, but these sellers don't move much of their product. Patrons notice lower prices elsewhere, and take their business with them. When a commodity is as widely provided as gasoline, by many, many competing sellers, the prices we see at the pump are simply measurements of intersecting supply and demand. It's a measurement in the same sense that inches can measure height, or pounds can measure weight. In a competitive market, prices are not arbitrary — and the word "gouging" is misleading jargon.

There are plenty of people in Missouri who were driving during the 1970s, in the days of gasoline price controls — which led to corresponding shortages, sales caps, and interminably long lines at the pump (and those lines are a form of price increase in themselves). There's no economic mystery here; if gasoline prices are set below market level by legislative fiat, people who value the gas less buy more of it, so the people who value it highly — who would be willing to pay a higher price — end up less likely to get what they need.

More importantly, prices act as a signal to producers as well as consumers. When prices rise, entrepreneurs rush to produce more, so they can sell more and make more money. This is exactly what's needed in times of emergency or crisis, as columnist Jeff Jacoby pointed out:

Imagine a system that could instantly respond to a calamity like Hurricane Charley by mobilizing suppliers to speed urgently needed resources to the victims. Imagine that such a system could quickly attract the out-of-town manpower needed for cleanup and repairs, while seeing to it that existing supplies were neither recklessly squandered nor hoarded. Imagine that it could prompt thousands of men and women to act in the public interest, yet not force anyone to do anything against his will.

Actually, there's no need to imagine. The system already exists. Economists refer to it as the law of supply and demand. Unfortunately, too many journalists and politicians call it by a more pejorative and destructive name: "price-gouging."

A steep rise in the price of gasoline doesn't reach the level of crisis that's caused by a particularly destructive hurricane, earthquake, or wildfire, but it's important all the same to recognize that setting legislative caps on prices leads to shortages in almost any situation — and shortages are bad for people of every social class. Economist Don Boudreaux pointed out that the alternatives to market prices can be just as much a problem for the poor and desperately needy as for the rich:

One alternative method of rationing is queuing.  But surely first-come, first-served is quite arbitrary.  Perhaps the father with starving children will get to the front of the line, but who's to say that the drug dealer won't beat him to the front of the queue? Indeed, the father with starving children likely has lots of important tasks to carry out at home in the immediate aftermath of a natural disaster. These tasks might well keep him at home too long to get a favorable spot in the queue, or, if he does get a favorable spot, he'll waste lots of time queuing rather than being at home with his family during an especially dire time of need.

An even more likely alternative to rationing by price is rationing by personal connections ? family ties or political ties. The poor family with starving children is unlikely to have as many personal and political connections as are wealthier people in town. The outcome of rationing by connections will almost certainly be biased in favor of wealthier, more-prominent citizens.

One great advantage of rationing by market prices is that they reduce to a minimum the role of arbitrariness. Price are, in other words, a great equalizer. Anyone who is willing to pay the market price for a good or service is just as likely to get that good or service as is the seller's mother, neighbor, or bowling buddy.

Ultimately, market prices allow people to plan and prioritize their needs in a rational way. If the price of gas is too high, it may mean you decide to carpool more or ride a bike for short trips — and, when you really need to, you can fill up and drive to important destinations or appointments. But if the gas is simply unavailable because "gouging" legislation has spurred shortages, everybody's needs and priorities are undermined. Except for the politicians — the real gougers — who can pretend they're helping you.

About the Author

Eric Dixon

Eric D. Dixon