Wednesday, May 30, 2007

Congress Messing with the Free Market

Fire of Liberty

Kevin Hassett has a good column over at on the whole "anti-gouging" crusade that has erupted in Congress with the passing of The Federal Price Gouging Prevention Act. As Hassett notes, Congress might think that they're doing something good for the American consumer by passing an "anti-gouging" law but in reality they are creating a situation that will force higher prices, limited supplies, and massive closings of the various gas stations in this nation. Now while I've tried my best to bring these economic truths to the readers, I have to say that Hassett (I'd add Thomas Sowell, Walter Williams and John Stossel to that list) does a far better job in doing the same but in fewer words. Here's a look at Hassett's good work:

Two Outcomes: Both Bad

That is clearly what is going on in gasoline markets. Countless firms compete against each other. If one firm tried to gouge, then the others would hold their prices low and steal the gouger's customers. No firm has the monopoly power necessary to truly gouge.

So there are really only two possible outcomes from this law. If economics prevails, no firm will ever be found guilty of gouging. If economics doesn't prevail, then Kafka will rise from his grave and send gas-station owners to jail for 10-year terms depending on some bureaucrat's idea of what is fair and unfair.

The potential for harm and abuse is real. I'm a season- ticket holder for the last-place Washington Nationals baseball team. Is it ``unconscionably excessive'' to charge $50 a ticket for my seats? Is it taking ``unfair advantage'' of baseball fans to charge so much money for a team whose cleanup hitter couldn't make the roster of the Red Sox? Perhaps!

The fact is, in almost all cases, gouging is good. If a hurricane destroys the electrical systems in a city, then electricians will be in very high demand. If they charge triple their normal fee, then electricians from around the country will see the high prices, and move to the hurricane-ravaged city. Areas that stand to gain the most from returning to normal will bid the highest for electricians' services, and will be the first to return to normal.

Random Luck

If Congress steps in and stops the gouging and forces electricians to charge what they always did, then no electricians would migrate to the stricken city, and a long queue would form for low-priced service. Random luck will determine who gets their electricity up and running first, and the rebuilding period will be much longer than it need be.

High prices are a pain, but they serve a useful function. Congress should give up the gasoline witch hunt.

I'd be nice if our members picked up an economics book or read columnists like Kevin Hassett before the enact such horrible legislation. We can at least wish that such happens.

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