Attorney General Bill Schuette has sworn not to let Michigan gas stations and distributors get away with price-gouging in the wake of Hurricane Harvey.
But Schuette was simply using the human tragedy in Texas as a platform for his own political self-promotion. While it is true that Harvey has caused some disruptions along the gasoline supply chain, including closure of some key U.S. refineries, it’s unlikely Michigan motorists will be significantly affected as a consequence. Instead, Schuette is probably just employing the recent outcry against gougers as a way to remind Michiganians who he is and that he is relevant.
While it can be fun to pick on price-gougers, painting them as opportunistic devils, it’s actually the AG who is acting opportunistically in this instance: elevating himself while engaging in demagoguery of others.
But the AG can do this only because people misunderstand the vital functions that prices play in a market system. When prices spike, they ration out the currently available supply, induce a supply response, and encourage conservation of the good that now has a higher price.
Prices serve a rationing function: When any good or service is in short supply, not everyone will be able to get it. You may choose to deny this claim, but you cannot render it false. And in polite society, we’ve used to utilizing the price of a good as the most orderly way to allocate what’s available. In doing so, we ensure that the good ends up in the hands of those who want or need it most, as reflected in their revealed willingness to pay a high price.
There are other mechanisms we could use to ration out such scarce resources in the short term — first-come-first-served, brute force, racial preference, gender bias, personal appearance or other personal characteristics, and social connections — but none proves as elegant at getting a limited quantity to those who value it most as the price. In fact, recent news reports out of Texas indicated that first-come-first-served mechanisms guarantee just one thing: gas stations will run out of gas.
In fact, if there is one thing that non-price rationing strategies guarantee it’s that the well-connected will always have what they need and want. That’s why the local, faithful customers of a given gas station are more likely to get gas during a crisis than helpless motorists passing by the same stop. If all the gas must be sold at a below-market price, then a station operator would be better off taking care of his friends and neighbors before worrying about a stranger’s fuel needs.
Prices induce a supply response: If some refineries have suspended operations as a consequence of Harvey, then oil companies would have strong incentives to release more of their reserves if they were permitted to charge the market price rather than the current price. By forbidding stations from raising their prices to the current market price, gouging laws obstruct the flow of more gas into the market. A given oil company would be better to retain its reserves hoping to sell them at a higher price in the future.
High prices promote conservation: The main reason that gas stations run out of gas during a crisis is that anti-gouging laws artificially keep prices low. This means that the same crazy people who bankrupt your local Wal-Mart of bottled water and toilet paper will do the same at your local gas station. If instead the price of gas were permitted to rise to its equilibrium price, people would act more sensibly, and consider whether they really need to purchase every drop of gas they can store.
Milton Friedman once said that gougers should be given a medal. He’s right.
Victor Claar is associate professor of economics at Florida Gulf Coast University and an affiliate scholar at the Acton Institute.