Worse than windfall

April 10, 2006

Last year's sharp increase in the price of gasoline has given rise to another threat: well-intended anti-gouging legislation that attempts to prohibit "windfall profits" from the marketplace.

In Annapolis, legislators may approve a bill in the waning hours of the 90-day session today that would not only limit petroleum price increases after a major storm or emergency but also would restrict prices of other "essential goods and services" (the fairly long list of which includes food, building materials and hotel room rates) under such circumstances.

That sounds good, of course. In the aftermath of a major hurricane, there are inevitably reports of individuals selling plywood for grossly inflated prices and generators for a small ransom. A recent investigation by Maryland Attorney General J. Joseph Curran Jr. raised questions about the state's high gasoline prices after Hurricane Katrina. In a letter to lawmakers, Mr. Curran suggested that some price increases at the pump were not justified and produced "dramatic increases in per gallon profit margins."

The problem is that government intervention in price-setting almost always makes matters worse. Aside from instances of unfair practices (collusion among competitors, for instance) or outright monopolies, the invisible hand of the marketplace tends to correct disparities far more quickly and efficiently than any bureaucrat or central planning office. Richard Nixon discovered this in the early 1970s when his effort to cap rising oil prices led to market shortages shortly thereafter.

Gasoline prices inevitably go up faster in a crisis than they fall when circumstances improve. But the law of supply and demand tells us that a business that grossly inflates its prices will be undercut by its competitors. While post-Katrina prices were, indeed, outrageous, prices today are quite similar. Supply is low, demand is high. State government can't change that equation - at least not with consumer protections that could easily backfire.

After an emergency, will service station owners seek more expensive supplies from nontraditional sources and risk punitive action by the state? They and other providers of essential goods may think twice. So should state lawmakers when they ponder price controls. The only thing worse than gouging may be having nothing to buy.

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