Submitted by Jonathan Newman via The Mises Institute,
Economists have a grumbling and cynical stereotype. This might be because even the most basic economic principles are ignored by those who should know better and vehemently denied by those who don’t.
Case in point: a restricted supply of gasoline is expected across the Eastern United States because of a busted pipeline, and state governors enact price ceilings to keep the price of gasoline artificially low.
In Alabama, Governor Bentley forbade “unconscionable prices for the sale of any commodity” in his State of Emergency proclamation.
Governor Deal did the same in Georgia. The Georgia Consumer Protection Bureau even has a Price Gouging Form, for citizens to tattle on other citizens for providing a good that is in more limited supply than usual. The website says, “Businesses may not sell motor fuel products, including gasoline, at prices higher than the prices at which those same products were offered before the declaration of the State of Emergency.”
Even first-year economics students know that when the price of a good is set arbitrarily low by government decree, the quantity demanded is greater than the quantity supplied. In other words, a shortage emerges.
The Function of Market Prices
Market prices are the result of an agreement between buyers and sellers of a good. All of the information deemed relevant by those buying and selling is incorporated into their preferences for the good. Sellers want higher prices and buyers want lower prices, but both are constrained. Buyers must outbid other buyers if they want it enough and sellers must underbid other sellers to attract buyers.
If the total stock of some good increases, buyers are only willing to pay lower prices and sellers, too, are willing to accept lower prices. This is because of the law of diminishing marginal utility. Additional units of a good must necessarily go toward the satisfaction of less urgent ends.
If the total stock of some good decreases, the opposite occurs. The marginal unit now satisfies a higher ranked end for both the sellers and the buyers. Prices increase. Nevertheless, the good is economized. Only those willing to pay the most and those unwilling to sell at lower prices acquire and keep the good. The good is reserved for the most valuable and important uses.
When the price of a good is legislated to be lower than what market participants would have, this delicate balance is tossed out the window. Resources aren’t economized and long lines stretch across our cities. Sellers hold back and buyers waste the good on less urgent uses.
Therefore the governors, far from protecting their constituents, have ensured their suffering. Many gas stations have already run out of gas. If allowed to raise their price, the consumers who need the gasoline the most would still be able to acquire it.
Price Controls Pass the “Do Something” Test
Professor Lucas Engelhardt, a Mises University lecturer, asked, “Who really thinks that being unable to buy gas is better than paying $6 a gallon?”
Indeed, we could pose similar questions for other sorts of price controls. Regarding minimum wage legislation, who really thinks that being unemployed is better than being paid $7.24/hour?
Surely Bentley, Deal, and all of the other politicians who have considered price controls know the consequences. It’s not a difficult concept to grasp. If we don’t need price controls to economize gasoline when we have our usual supply, how could they possibly help when we have less than our usual supply? Would we need price floors if all of the sudden we had 50% more gasoline than usual?
So if economists are so smart, and the consequences of price controls so glaringly obvious, then why do they still exist?
Unfortunately, not enacting price controls doesn’t pass the “You gotta do something” test. Many voters, unaware of what they are truly asking for, pressure their politicians to just “do something.” The masses clamor for action, not realizing that the best course of action for our politicians is for them to just sit on their hands.
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