Stopping hoarding and frivolous consumption in a time of crisis

Here’s a flashback to 2005, when Dr. Karen Palasek wrote a Free Market Minute column about how “price gouging, a term that has no economic meaning, is actually helpful in averting a gas crisis.”

How could it be helpful? Because it helps prevent hoarding and frivolous consumption and therefore ensures gasoline is still available to the neediest.

Writing in the aftermath of Hurricane Katrina, Palasek warned that anti-“gouging” laws would

very likely bring us to the point of more empty gas pumps, long gasoline lines, gas rationing, or some nightmare combination of the three. Keeping the pump price lower than it would otherwise be through these policies will also encourage non-essential driving, and discourage conservation.

Palasek pointed out the temporary changes in supply and demand that were changing gasoline prices, which an anti-“gouging” law would not account for, to the detriment of people who need gasoline the most:

Katrina destroyed refining capacity, and that will reduce supplies of domestically refined gasoline, and push up market-clearing level of price, at least temporarily.

At a high enough price, gas will always be available to those who need it most. But when gasoline is sold below its replacement cost, stations ‘run out,’ and gas is available only to the lucky. This might be fine for a lottery, not for a market.

Regulations that prohibit gasoline prices from reaching a market-clearing level will ensure that gas remains unduly scarce.

The issue, as Palasek explained, isn’t an “ethical” price; it’s helping people be able to access a temporarily scarcer necessity:

Prices aren’t ethical or unethical. If exchanges are voluntary, all pricing is fair.

The way to reduce the quantity of gasoline demanded in the near term is to allow price to rise to whatever the market will bear. This is not price gouging, it’s responsible reservation of a scarce good—like the reservation pricing we see in collectibles and other markets.

Only those with really urgent demands will pay the highest prices, as should be the case. The rest of us will conserve, and adjust for the future as the situation unfolds.

That’s a key point. You’re not forced to buy when exchanges are voluntary. If you think the price is too high, and you’re not faced with an urgent need, you won’t pay. As consumers make that mental calculus, they are rationing their consumption on their own without a rationing law forbidding them from buying.

And without even thinking about it, they are preserving gasoline for people with the greatest need for it.

Jon Sanders / Director of Regulatory Studies

Jon Sanders studies regulatory policy, a veritable kudzu of invasive government and unintended consequences. As director of regulatory studies at the John Locke Foundation, Jo...

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