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In praise of 'price gouging'

  • frustrationatgasstation.jpg

    People line up to fill gas containers at the New Jersey Turnpike's Thomas A. Edison service area Wednesday, Oct. 31, 2012, near Woodbridge, N.J. After Monday's storm surge from Sandy, many gas stations in the region are without power and those that are open have very long lines. (AP Photo/Mel Evans)

  • Fuel Shortage, fuel line, gas station

     (REUTERS)

Desperate New Jersey drivers wait in long lines to buy gasoline. One line was two miles long
The media blame “a lack of electricity” and report that “Governor Christie has acted to boost supplies of gasoline…by directing Treasury officials to waive licensing requirements that affect merchants’ ability to buy fuel from out-of-state suppliers.”

That would help, but Christie would help more if he could suspend New Jersey’s foolish law forbidding price increases of more than 10% during an “emergency,” and if he’d apologize for bragging that the state will crack down on price “gouging!”  

Complaining about greedy profiteers is probably politically smart. But if you're one of the people the law "protects," you won't fare as well.

What politicians call “gouging” is just the free market. When markets are allowed to work their magic, lines disappear.  The high price is a big flag planted in the ground that says, “Hey, come over here and make money.”  

Today, some car owners wait in line just to top off their tanks. If gas stations could raise prices, many of those drivers would wait, and drive less.  Drivers who really need gas would be able to get it.    At the same time, entrepreneurs would rush gasoline to gas stations that have the highest prices.   The lines would quickly vanish, and prices would come back down.

Remember The 1970s “gas crisis?”  The media claimed it was caused by a lack of gasoline.  It wasn’t.  It was caused by President Nixon’s price controls.   Remember the lines in the Soviet Union?   Most shortages are caused by politicians interfering with the market.

Here's the real question: What is the best way to help people after a disaster?

Any number of services -- roofing, for example, carpentry, tree removal, and gasoline -- are in overwhelming demand.  

Complaining about greedy profiteers is probably politically smart. But if you're one of the people the New Jersey anti-price gouging law "protects," you won't fare as well.

If this were a totalitarian country, government could just order gasoline tankers roofers, carpenters, etc., to travel to New Jersey. But in a free society, entrepreneurs must be persuaded to leave their homes and families and drive from say, Texas, to the East Coast. If they can't make more money in New Jersey, why make the trip?

Some want to be heroic, but we can't expect enough heroes to fill the need.  Most travel for the same reason most Americans work: to make money. Most tradesmen will go to a disaster area only if it wins him higher pay than he would get in his hometown.  

Yet if he charges enough to justify his venture, he's likely to be condemned morally or legally by the very people he's trying to help.

They just don't understand basic economics. Force prices down, and you keep suppliers out. Let the market work, suppliers come -- and competition brings prices as low as the challenges of the disaster allow. Goods that were in short supply become available. I discuss this in greater detail in my book, "No, They Can't: Why Government Fails-But Individuals Succeed."

 After Hurricane Katrina, Mississippi Attorney General Jim Hood announced a crackdown on “gougers.”

John Shepperson was one of the "gougers" arrested. Shepperson and his family live in Kentucky. They watched news reports about Katrina and learned that people desperately needed things.
Shepperson thought he could help, so he bought 19 generators. He and his family then rented a U-Haul and drove 600 miles to an area of Mississippi left without power.

He offered to sell his generators for twice what he had paid for them, and people were eager to buy.   But police confiscated his generators, and jailed Shepperson for four days. The police kept his generators.

Did the public benefit? No.

It's price "gougers" who bring the water, ship the gasoline, fix the roof, and rebuild cities. You might not believe me but will you believe Nobel Prize-winning economists Gary Becker, Vernon Smith and Milton Friedman? All three have said “ gouging” is good. Milton Friedman said, “price ‘gougers’ save lives.”

We benefit when  politicians  don’t “protect” us with price controls.

The debate over price gouging continues Thursday night on "Stossel" at 9 pm ET. For more on the show, click here.

John Stossel is the host of "Stossel" (Thursdays at 9 PM/ET), a weekly program highlighting current consumer issues with a libertarian viewpoint. Stossel also appears regularly on Fox News Channel (FNC) providing signature analysis. Click here for more information on John Stossel.