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September 6, 2005

Defending Price Gouging on Mississippi coast

My brother lives in Pensacola, Florida and has been working in Biloxi, Mississippi. When I spoke to him tonight, he assured me that there is essentially no gasoline available south of Jackson, Mississippi.

What is the reason for the gasoline shortage on the coast?
A) A terrible hurricane destroyed the coast.
B) Gasoline companies are not reacting quickly enough.
C) Refineries on the coast were impacted by the storm.
D) It is illegal to charge what the gasoline is worth.

Although A, B, and C are all problems that affected the availability of gasoline in the huge area devestated by the hurricane, the correct answer is D. The quickest way to solve the problems caused by the hurricane is to allow the free market to set the prices of water, ice, and gasoline.

Adam Smith, the father of modern economics, said:

Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it... By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

So, the theory of capitalism is that people act in their own self interest to make a profit, and inadvertently help society in the process. Governmental intervention in markets with arbitrary price controls frequently does more harm than good. Arresting people for raising gas prices, in this case, may not be the best solution.

Consider that the current situation is clearly chaotic, and no gas is available. Cars are running out of gas on the side of the road. Gas stations that have gas and electricity to pump it are patrolled by police as customers wait in line for six hours, pushing their cars toward the pumps. There is essentially no gasoline for sale on the coast.

Clearly, gasoline is worth more then $2.50 a gallon on the coast of Mississippi. I would guess that people would be willing to pay $5-$10 a gallon. That would be close to the true value of gasoline on the coast. If we let people charge the true value of the gas, then the "invisible hand" would make attack the supply and demand side of the gasoline shortage simultaneously, and then gradually drive down the price of gasoline until it leveled out at the national average.

On th supply side, if you knew that you could buy gas in Texas and drive it to New Orleans and make a profit of $2.00 a gallon, thousands of people would be driving 18 wheelers full of gasoline tomorrow into the area. On the deman side, if the price were allowed to rise according to what the free market it willing to pay, then the gas would cost more, and people would drive less because gas would become a more valuable commodity. As supply increased, and demand decreased, the price of gasoline would promptly fall to the national level.

Unfortunately, the government is not going to do this, for various reasons. The government is, in effect, unintentionally exacerbating the gasoline shortage on the coast by keeping prices artificially low. Because the prices are frozen, the gasoline will not flow to the areas where it is needed the most.

Update: Looks like others have made similar observations like Tempus Fugit in The Myth of Price Gouging.

Posted by Peenie Wallie on September 6, 2005 at 10:15 PM