Price Gouging: Politicians Vs. Economists

Michael Giberson

Price gouging has been all over the news lately. In Kentucky the state Attorney General has sued Marathon Oil for allegedly gouging customers in the months after Hurricanes Katrina and Rita. (Marathon is counter-suing the state, claiming the state’s law is unconstitutional on a number of grounds.) In Missouri the state has recently settled a number of price gouging complaints against hotel, gas stations and hardware stores alleged to have abused the public following ice storms in January. New Jersey lawmakers are seeking to stiffen penalties for gasoline price gouging. And it almost goes without saying that somewhere on Capitol Hill Senators and Representatives have a half-dozen or so price gouging bills circulating.

Few things drive economists crazy faster than a politician talking about price gouging. A year ago, Glenn Hubbard, speaking on the radio news program Marketplace, said:

Consider Congress’ pandering offer of $100 tax rebates to help cover the cost of gas. Or President Bush’s recent call to investigate “price gouging” while simultaneously pressing for greater investment in the oil industry.

These statements are sufficiently over the top to bring forth an involuntary Econ 101 reaction. You know what I mean — supply and demand.

Brad DeLong liked the Hubbard remarks well enough that he posted the full piece on his blog. Brad DeLong also liked the posting of Jim Hamilton at Econobrowser last year:

Last week the U.S. House of Representatives voted by an overwhelming margin to guarantee gasoline shortages the next time we face a significant disruption in petroleum supplies.

One of the common complaints I hear from noneconomists is, why should the price of gasoline go up as soon as there is any news of a disruption …?

Why, indeed? The answer is, because if the price didn’t spike up immediately on the news, the result would be a disaster for the public.

Why would it be a disaster? Gary Becker and Richard Posner tackled gouging in the post-Katrina/post-Rita aftermath, back in October 2005. Becker wrote:

Attempts to suppress prices of gasoline or other goods that experience a great reduction in supply will require using less efficient ways to allocate the limited supply. The main alternative to higher prices is rationing in some form of another, such as selling on a first come first served basis, selling to persons willing to bribe the suppliers, and so forth. All these ways are inefficient, and discourage production instead of solving the problem of reduced availability of certain goods.

It is easy enough to recycle old arguments on price gouging because the economic lessons here are clear, commonsensical, and well settled. The policy debate remains as unsettled as ever, it seems. Maybe economists need to develop some new arguments.

4 thoughts on “Price Gouging: Politicians Vs. Economists

  1. Consider Congress’ pandering offer of $100 tax rebates to help cover the cost of gas.

    OTOH, a program that combined a rise in the gas tax with a flat rebate would be a fairly economically efficient way to reduce gas consumption while addressing the issue of the tax being regressive. So a flat tax rebate because of higher gas prices is not necessarily pandering and a bad idea, if coupled.

  2. Maybe economists need to at least acknowledge policy goals other than efficiency (e.g. equality) when putting forth their (very important) econ 101 argument.

    Education to avoid histeria and hoarding can also be an effective demand suppressor in addition to higher prices.

  3. Also, it’s worth noting that a flat $100 rebate for high gas prices is much better than temporarily cutting the gas tax because gas prices are bad. So I didn’t actually think that that proposal was so bad, as far as things go.

  4. I don’t remember how the $100 rebate was supposed to work, but in terms of non-distorting disbursement policies a simple $100 per head “gift” is relatively clean.

    On the other hand, if the rebate was actually targeted to somehow directly “help cover the cost of gas,” it would only help stimulate demand for gas and push prices higher.

    I think it was in Glenn Hubbard piece that he said something to the effect that “the only cure for high prices, is high prices.” They are what will drive competing suppliers to invest to bring more to the market, and will drive competing consumers to substitute away from the good.

    Non-price rationing mechanisms tend to increase the administrative costs involved in allocating goods and services, and do less well in ensuring that goods are devoted to there most valuable resources.

    Not saying that prices can solve every problem, but particularly in the case of gasoline it is clear that the alternatives that have been tried don’t work as intended and tend to make people worse off overall.

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