The cyberattack on the Colonial Pipeline has spurred temporary supply disruptions and induced panic-buying of gasoline, resulting in long lines and empty gas stations in the Southeast over the past few days. Images on social media showed someone who filled up plastic bags of gasoline and loaded them into their SUV — ignited a conversation on the role price gouging in times of supply shocks.
In response, Duke Professor of Political Science Mike Munger made the bold and true affirmation that “price gouging laws cause hoarding.” Yes, you read that correctly. It is a counterintuitive but accurate claim, and disregarding this truth will lead to even greater shortages.
Let us take the most charitable approach to price gouging laws: They are enacted by state and local governments in times of supply shocks to protect the consumer against firms who can presumably use the crisis to line their pockets by charging “excessive” or “unconscionable” prices. Price gouging laws often state that prices cannot exceed a certain percentage of average prices in a recent time period.
The problem with all of this is how, in the time of an unanticipated supply shock, can a state bureaucrat know how much price inflation should be permitted? The short economic answer is that they cannot possibly know.
Prices are the most sophisticated, elegant and nimble mechanisms of a market. Market prices, unlike arbitrary prices often imposed by law, are decentralized — they are the result of bargaining and exchange, not the precursor to them. Prices give us economic signals about underlying levels of scarcity and how they are changing. In this respect, market prices are always and everywhere relative. The attack on the Colonial Pipeline could not have been anticipated beforehand, and as such we cannot think through what prices “should be” ahead of time.
Prices are always in motion and their very benefit is their agility. In the face of a supply shock, prices do the work that advanced calculus cannot — they rapidly change and signal to consumers that we need to slow down or speed up our consumption. In the case of the current gas shortages, rising prices signal to consumers that gas is more scarce than it was before.
The price increase moderates consumption and works to ensure that we don’t deplete scarce resources. Also, the price increase signals to producers that gas is more profitable, thereby encouraging them to bring more to market. These countervailing forces of supply and demand result in relative prices. Temporary price increases allow consumers and producers to cooperate rather than to hoard and pillage. Again, this sounds counterintuitive, but economics is about incentives — not intentions.
Consumers often preach that without price gouging laws, suppliers would rush to take advantage of our need for gasoline. Thus, they suggest, we must have laws that prohibit prices from rising “too high” so that everyone can still afford gas. Yet, the opposite results. Price gouging laws set forth a bevy of incentives which include hoarding. It is because prices are not allowed to rise as high as the market would dictate they should under a supply shock, that consumers don’t get the memo to slow down their consumption which encourages depletion.
The price gouging laws create artificial price ceilings, which means that instead of filling up my tank when I need to and making conscious decisions to drive as little as possible in the shortage period, I head to the gas station and fill up trash bags full of gasoline — an activity that is both dangerous and further exacerbates the shortage.
Panic buying occurs because the prices are not allowed to temporarily rise. Hoarding is necessarily the response to these arbitrary price ceilings, and it induces black market activity. If we allow prices to rise temporarily, we even out and moderate consumption patterns, and assuage the panic response.
What happened this week is not new and price gouging laws are almost as old as time — St. Thomas Aquinas, the 13th century philosopher, himself wrestled with “just” prices. Yet justice is obtained by recognizing that we live in a world of scarcity and that the goal is to allow adaptability and entrepreneurship to help lessen the tradeoffs we face which increases our well-being.
Price gouging laws make us feel good but act badly. The Colonial Pipeline episode should serve as a lesson to us: When markets work, they adapt to even the worst supply shocks and ensure that we get more of the things we need and want.
• Anne Rathbone Bradley is academic director at The Fund for American Studies (TFAS), a nonprofit educational organization that promotes the principles of limited government, free-market economics and honorable leadership, where she teaches courses on economics.