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.
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.
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.