In Defense of Price Gouging
Yesterday the House of Representatives passed a bill outlawing gasoline “price gouging.” Violators would face penalties of fines as high as $150 million or prison terms of up to two years. Price gouging is defined as “taking unfair advantage” or charging “unconscionably excessive” prices for fuels. What is unfair advantage? How does one measure when a price is unconscionably excessive? There is no answer.
This is bad law. First, because it is non-objective. Because no objective definition of price gouging is provided in the law, a gas station owner or oil company can never know when it is breaking the law. There is no way to comply with a law when the crime cannot even be defined. More ominously, a non-objective law becomes a tool to terrorize in the hands of unscrupulous government officials. The businessman is told that he must obey the bureaucrat or face punishment, a punishment he cannot defend against because there are no objective standards. This is a tool of tyranny. Incidentally, this is also the nature of antitrust. Like this anti-gouging measure, antitrust law is completely non-objective.
The other reason why this law should not be passed is because it is anti-capitalist. It attacks the heart of the market economy, which is the price mechanism. Prices work to harmonize the interests of buyers and sellers when they are allowed to freely rise and fall. This type of law, to the extent it is enforced, will function as a price maximum. Price maximums, enforced by the state, have one predictable consequence, shortages. This is true in all eras and for all commodities. The pricing principle is an iron law of economics, as solidly and universally valid as the law of gravity. Violate it by imposing price controls and artificial shortages will develop. The principle that price controls cause shortages is an iron corollary of the iron law of prices.
Price controls cause shortages because of two reasons. First, suppliers provide less gasoline (or any other controlled commodity) because they cannot make money selling at the lower price. They cut production until they no longer lose money. Second, at the lower price, customers want more of the product. Combine these two effects – reduced supply and enhanced demand – and you have a shortage. Supply and demand are no longer in equilibrium.
The sad consequence of all attempts to squeeze the profit out of the oil companies, whether through price controls, windfall profits taxes or other means is less production of oil. Oil companies that cannot charge market prices or earn market profits will invest less in the entire oil infrastructure, from gas stations, to oil refineries, to drilling platforms.
We pay high prices for oil for several reasons, all of them a consequence of our government failing to enforce rights, or actively violating them. One is the banning of oil drilling on certain lands, such as the Alaskan tundra, or the oceans off of
Looked at from a broad, historical perspective, high oil prices are the consequence of decades of appeasement in the
With the anti-gouging bill, the House of Representatives is grandstanding at our expense. In an effort to curry votes from ignorant voters, the House lays the groundwork for new gasoline shortages. Moreover, it diverts attention from the party responsible for high oil prices, themselves.