Why There's No Such Thing as Gouging
uthor: Les Lafave

As I go out at 5.30 a.m. on a Sunday morning to cruise for
gas in Atlanta, I think about how different things might be
if any southern governor could tell the difference between
capitalism and a donkey's or elephant's ass.

This isn't an efficient use of resources. It's a waste of
my time, the station's time (where, when gassed, most are
ad-libbing line-up systems of tape and cones that appear to
require extra staff), the government's time (where state
governments now seem committed to investigate hundreds of
cases of "gouging"). It's a waste of gas, since it takes
gas to cruise for gas.

It's also risky. A shortage of gas could become a shortage
of trucking capacity, which becomes a shortage of food,
which becomes a shortage of emergency services when there's
a surplus of riots.

The simple cure for shortages are market prices. However,
even as Hurricane Ike lined up offshore, southern governors
and officials lined up on T.V., with promises of punishment
for "gouging". They were always much more clear that
gouging should be reported and prosecuted, than they were
about what it actually was-- certainly from the tones of
voice though, whatever it was, it sounded pretty bad.

Certainly it's not fun to have a price double or triple
overnight. But I can now tell you from direct experience
that it's even less fun to obsess over your gas gauge as
you pass empty gas stations one after the other.

There's also the potential that while price spikes are
short term, price fixing shortages are forever.

If prices can go anywhere, they generally only have to test
the upper limits once, and it's over fast. Exploitable
profit opportunities get filled, if you don't block them.
We may not know exactly how they'd materialize, but they
always do: more storage at the refinery or the gas station
(or somewhere in between); more trucking capacity lined up
when there's a storm; more spent on storm and disruption
modeling by industry; new refineries built in different
locales. Users may also decide to store a little emergency
fuel for next time-- a positive "hoarding" effect.

Without the price mechanism, it's a different story-- we
get stuck-- in this case, potentially literally.

On Saturday, as I was passing out of gas cars, I also saw
lots of game day college road trip football flags.
Important, certainly. But I would have liked to see that
proven case by case at market prices-- gas money can also
be used for beer kegs at a T.V. party-- a well known
college substitution effect that a good governor, if there
are any, would do well to remember.

I cut my Saturday driving short, but I'd promised to watch
a junior tennis match on Sunday, and probably would have
paid pretty much anything for a few gallons of gas. A
promise to a teenager may pass unnoticed or disdained,
until the one time it mysteriously becomes tragically
important. So I found my early morning gas station. The
station unlit-- it didn't need lights to do brisk business
at 6 a.m. at $4.39 per gallon. Regular gas only, but my
car seemed grateful.

The ease with which a relatively minor storm of populism
can sweep away simple lessons of economic common sense,
apparently permanently, is disturbing.

To put it in Sesame Street terms-- prices are our friends.
They need to move around in order to help us. We also need
to keep in mind some pretty simple business facts. A
demand that a station not "gouge" will most often be a
demand to lose money. Selling a week's worth of fuel at
yesterday's profit margin in one morning blaze of glory,
and then going dark for a few days until you hope to get
more-- that amounts to making a "fair" profit for a few
hours, and then losing money for a few days-- repeat that
often enough, and it's a recipe for going out of business
(and perhaps making the shortage worse next time.)


About the Author:

Les Lafave
http://www.themaestrosrep.org
How the term "free market" became history's biggest
oxymoron.