Why There’s No Such Thing as Gouging

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.)

Les Lafave

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