John Stossel writes in his column, In praise of price gouging, why raising the price on items that will be in huge demand will ensure that there is enough supply for everyone. His point is first made by discussing bottled water, and the difference between what happens when the price is held low, versus allowed to go up to coincide with the demand:

At $1 a bottle, they stocked up. At $20 a bottle, they bought more cautiously. By charging $20, the price gouger makes sure his water goes to those who really need it.

This is exactly what happened last week with gasoline here in Atlanta. Suddenly, everyone expected that Atlanta was going to run out of gas by the end of the week, and hysteria was created. Everyone (well, not me) went out to fill the tanks of all of their cars, which immediately created a shortage. Before Katrina, gasoline was in the $2.50-$2.70 range here in Atlanta. Immediately most stations raised prices, some to as high as $5.00 or even close to $6.00 a gallon.

Governor Purdue signed an executive order enacting Georgia's price gouging statute. But this statute "does not prevent price increases that accurately reflect an increase in the cost of the goods or services to the retailer, an increase in the cost of transporting the goods or services into the area, or an increase due to the market forces of supply and demand."

Was demand high last Wednesday? I'd say so. Lines formed out onto highways. People bought out gasoline containers at hardware stores to fill them up. People pulled their boats up to fill them up. If you want to apply pressure to artificially keep prices low (which was a staple of communism), you also have to apply pressure to keep people from hoarding, by rationing (which was also a staple of communism). We don't want to go down that road.

Basically, when you can't raise the supply to meet the demand, you have to raise the price. This has the effect of reducing the demand. Others understand economics much better than I, but I understand this basic idea pretty well.

The net result of last Wednesday's fiasco is that some people ended up buying dozens of gallons of gasoline at artificially low prices, while others were stuck with no gas at all. One woman we know was trapped in the Atlanta area, unable to return home to Lake Hartwell, because all of the gas stations were out of gas. Had the price risen due to the demand, hoarders would not have bought dozens of gallons. They would have done what I did -- my sedan was full of gas, and I knew we could move the kids out of the van and into that if we really needed to, so we were OK for the week. Then there would have been gas available for people who really needed it - and though it certainly would have been more expensive, they would have been able to get home.

The reality is this -- when resources, such as water, are scarce, the free market dictates the price. When you have water and I don't, and I want to buy it from you, if it's scarce then you're only going to part with it for a lot of money, or something else that has a lot of worth, such another scarce resource. The reason why capitalism works is because it models this approach. And when a resource is scarce and prices go up, you encourage more suppliers to come in and bring the price down. When the government steps in and meddles with price or supply, it will only mess things up. Last Wednesday's gasoline fiasco is a testament to that.

Labels: politics