Let the Sun Work

The Thin Line Between Gouging and Sound Policy

As the supply of petroleum products, notably gasoline and diesel fuel, declines, there will be intermittent shortages. Some will affect only specific areas, and many will affect entire nations. As these shortages ripple through the economy, how will they affect prices? Past experience would indicate that those who sell products into a shortage will display a curious and dysfunctional ambivalence. They will increase prices; no, they will hold prices steady. They will price-gouge; no, they will limit quantities. The uncertainty and confusion will cause their customers to panic, quizzing each other constantly about who is charging what, who is selling what, and who needs to be prosecuted for their “criminal’ behavior; warning each other that “you better go get gas right away.”Here’s our suggestion that we explicitly make “price-gouging” (or whatever term you choose to use for it) not only legal but recommended.

As the supply of petroleum declines and the supply of refined products fluctuates, there must be some means of allocating it from day to day to those for whom it is most precious. The emergency room physician who must get to work needs it worse than the teenager who wants to take his girlfriend to the lake; the trucker that delivers generators to Home Depot for sale needs it worse than the middle-age couple wanting to take a pleasure trip. The police department that needs to maintain order needs it worse than the family that wants to grab supper at McDonald’s.

If merchants are afraid to increase prices in the face of a shortage, their supply will quickly become exhausted, as panicked buyers flock to purchase and hoard every drop they can store and leave the supply unavailable to those who really need it a day or two later. If merchants are free to increase price in the face of a shortage, those who really need it will pay the higher price, and those who don’t will wait for the price to decline later.

Will this produce unexpected profits for those merchants who buy a supply of gasoline or diesel fuel and are able to charge twice as much as they expected? Well yes, but is that so horrible? We explicitly allow this in nearly every other context. Do we accuse a landowner of “price-gouging” when she sells her property for five times what she paid for it because a big auto plant located close by? Do we accuse the brokerage company of price-gouging because it sees the price of the stock it holds increase? Of course not. We call that smart investment, or just good luck. Why is it that we reserve the epithet exclusively for merchants who might benefit from astute buying decisions?

Our condemnation for merchants who charge more during shortages flows at least partially from fear that it works to the disadvantage of those who are less fortunate. The poor widow who needs gasoline to visit her grandchildren now can’t afford to go see them. How should Chevron be so cruel? If that grandmother needs to get to the clinic for her dialysis treatment she can get help to get there from government, from church, or from a neighbor, but if she wants another visit with the babies she may need to wait. No, we suspect that we use that grandmother as a ruse. Our primary concern is that we don’t want to be inconvenienced, and we don’t like confronting the reality that we’re going to have to pay more for the fuel we want.