September 23, 2008

Is It Price-Gouging? No, It’s ‘Resource Allocation’

Gas stations should be allowed to charge any price they want.

Stop and think. There are gas stations all around us. All of them havesimilar products and must compete with one another.

We have regulations and agencies that watch to make sure there are no cooperative arrangements among stations.

Why, then, are price-gouging laws such a bad idea?

First, the price restriction interferes with market forces. For example, gas stations anticipate a lack of supply of gas over the next couple of weeks because of the hurricane in the gulf. They raise their gas prices to allocate the remaining supplies within their tanks. In fact, consumers do the same thing. Consumers expect gas prices to rise with the possibility of disruption to gas supplies.

Consumers increase their demand, putting an upward pressure on prices. Those consumers who really needed gas today are willing to pay a higher price, which is the reason prices should be allowed to change freely. Price allocates scarce resources.

When gas stations are not allowed to raise prices, shortages will develop. No one should be surprised that gas stations in the area ran out of gas.

Of course, some and maybe most consumers do not like the idea of high gas prices. I do not like the current high prices, but I definitely do not like it when I am driving around to three and four gas stations because there is no gas to be found.

Consumers also comment that gas stations take advantage of customers when such events take place; however, this does not pass the smell test.

Gas stations earn additional revenue by providing other services. When they do not have gas available, consumers often go elsewhere.

Some of you might argue that equilibrium prices were not really that high. Then, why did we run out of gas? Gas suppliers must compete with similar types of product - gas price is one avenue.

If gas stations all around are artificially charging $6 a gallon, then one station would simply undercut the others. The other stations would be forced to do the same to compete.

Gov. Sonny Perdue recently signed an executive order enacting Georgia's price-gouging statue to protect Georgia consumers from unlawful increases in gas prices and other products. Why?

Does this imply that price-gouging is OK when this statue is not enacted? What are "unlawful" increases, exactly? Remember, we as consumers do not have to purchase gas.

Gas at $3 a gallon or $4 a gallon. Never mind that I am willing and able to pay these prices. In the midst of a panic as consumers race to the stations to top off their tanks, you put an upward pressure on price.

Demand for gas rapidly increased. Price increased as it should to allocate gas among the most in need. I, on the other hand, did not really need the gas and decided against topping off. The market worked until talk of gouging came into play.

Finally, the assumption that gas stations should not be allowed to change the price when they pay one price to fill their tanks is incorrect.

Supply and demand conditions are constantly changing such that price continually allocates resources.

The storm might cause some disruption in the supply line. That is, gas stations might need to allocate their remaining gas until the next shipment. The fear of running out might result in gas stations wanting an extra shipment. They must pay for that extra shipment and be compensated to bring the new gas to market.

If consumers do not and are not willing to pay the price for gas or the extra price for more gas when a disaster hits, then don't. But you cannot be surprised when there is no gas.

It really is quite that simple.

Mark A. Thompson is the Cree-Walker professor of business administration at Augusta State University. He can be reached at [email protected]

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