Ron Paul Likes Price Gouging
by
Ron Paul
Recently
by Ron Paul: The
Economics of Disaster
As
the northeastern United States continues to recover from Hurricane
Sandy, we hear the usual outcry against individuals and companies
who dare to charge market prices for goods such as gasoline. The
normal market response of rising prices in the wake of a natural
disaster and resulting supply disruptions is redefined as “price
gouging.” The government claims that price
gouging is the charging of ruinous or exploitative prices for
goods in short supply in the wake of a disaster and is a heinous
crime. But does this reflect economic reality, or merely political
posturing to capitalize on raw emotions?
In
the wake of Hurricane Sandy, the supply of gasoline was greatly
disrupted. Many gas stations were unable to pump gas due to a lack
of electricity, thus greatly reducing the supply. At the same time
demand for gasoline spiked due to the widespread use of generators.
Because gas stations were forbidden from raising their prices to
meet the increased demand, miles-long lines developed and stations
were forced to start limiting the amount of gasoline that individuals
could purchase. New Jersey gas stations began to look like Soviet
grocery stores.
Had gas stations
been allowed to raise their prices to reflect the increased demand
for gasoline, only those most in need of gasoline would have purchased
gas, while everyone would have economized on their existing supply.
But because prices remained lower than they should have been, no
one sought to conserve gas. Low prices signaled that gas was in
abundant supply, while reality was exactly the opposite, and only
those fortunate enough to be at the front of gas lines were able
to purchase gas before it sold out. Not surprisingly, a thriving
black market developed, with gas offered for up to $20
per gallon.
With
price controls in effect, supply shortages were exacerbated. If
prices had been allowed to increase to market levels, the profit
opportunity would have brought in new supplies from outside the
region. As supplies increased, prices gradually would have decreased
as supply and demand returned to equilibrium. But with price controls
in effect, what company would want to deal with the hassle of shipping
gas to a disaster-stricken area with downed power lines and flooded
highways when the same profit could be made elsewhere? So instead
of gas shipments flooding into the disaster zones, what little gas
supply is left is rapidly sold and consumed.
Governments
fail to understand that prices are not just random numbers. Prices
perform an important role in providing information, coordinating
supply and demand, and enabling economic calculation. When government
interferes with the price mechanism, economic calamity ensues. Price
controls on gasoline led to the infamous gas lines of the 1970s,
yet politicians today repeat those same failed mistakes. Instituting
price caps at a below-market price will always lead to shortages.
No act of any legislature can reverse the laws of supply and demand.
History
shows us that the quickest path to economic recovery is to abolish
all price controls. If governments really want to aid recovery,
they would abolish their “price-gouging” legislation and
allow the free market to function.
November
24, 2012
Dr. Ron
Paul is a Republican member of Congress from Texas.