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Price Caps

Gasoline prices are a sore subject right now. It’s understandable that people don’t like paying high prices, especially when they’ve risen suddenly, as they have in the aftermath of Hurricane Katrina.

Sadly, some people think that government should protect them from everything that they don’t like. So now, instead of trying to understand the economics of the situation–or growing up and accepting the fact that sometimes life just doesn’t go the way they want–the whiners lobby is doing what it always does: turning to government to fix their boo-boos. And, as it usually does, the whiners lobby is offering a simplistic pseudo-solution that will only make matters worse.

In this case, the simplistic pseudo-solution is price caps. But the lesson of the 1970s is clear: Price caps lead to shortages. Benjamin Powell and Art Carden do a solid job of explaining why in an Independent Institute op-ed. As Powell and Carden point out, when the gasoline supply is diminished–as it has been since Hurricane Katrina–and prices are kept artificially low, people don’t conserve; they keep using as much gasoline as they were before the disaster. That means long pump lines. It means insufficient fuel for rescue vehicles. And it means weakened national security.

There is a better option. Especially in times of crisis, it is important to let the market work. As the horrific aftermath of Hurricane Katrina shows, the market responds to urgent needs much faster than the government.

Prices are the signal that let the market do that. They communicate to suppliers what is needed, and where. When prices are artificially suppressed, the market does not receive reliable information, and vital resources are misallocated.

When prices are natural, the market does what it does better than any command-and-control system: it quickly and efficiently allocates scarce resources where they are needed most.

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2 thoughts on “Price Caps

  1. Dropped in and thought your blog and the posts I read were awesome! I came in from some blogging window after surfing search results for ways to save some money. The gas hikes are killing us here!

    A dull and boring thing to be searching for so when I ended up on your blog, I was thrilled to have something lively to read!

    Anyway, thought I’d leave a note of thanks. Perhaps they’ll keep you motivated one day when you don’t feel like writing.

    You know it’s not just gas costs, but credit card rates from our old cards. I found a site that lists credit card deals and then it hit me! You can get cash back on the stuff you have to buy anyway. Right now, anything helps…

    Sorry for the long post…I’ll be back to see what’s new in a day or two. Thanks again!

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