The Myth of "Price-Gouging"
By Alex Epstein (Tampa Tribune, December 20, 2005; Calgary Herald, April 28, 2006)
The recent announcement of record profits by ExxonMobil and Chevron has revived widespread claims that these profits were extracted by "price gouging." Thus, the stage is set for Washington to pass a federal law banning "price gouging." Senate Majority Leader Bill Frist, for his part, has promised that "if the facts warrant it, I will support a federal anti-price gouging law."
But there are no facts that could warrant such a law, because there is no such thing as "price gouging" by private businesses.
The term "price gouging" implies that gas stations have an ability to forcibly inflict harm on us--but they do not. Any price we pay for a gallon of gasoline--whether $1 or $3--we pay voluntarily, based on the value of the gasoline to us. If we think we are spending too much on gasoline, we are free to drive less, to buy more fuel-efficient cars, to use carpools or busses, or to travel by bicycle or on foot. Gas station owners cannot force us to buy gasoline; they can only offer us a trade, which we are free to accept or reject.
But, one might ask, without anti-"price gouging" laws won't owners of gasoline charge the absolute highest prices they can? Absolutely, and they have every moral right to do so--just as consumers of gasoline have every right to pay the lowest prices they can find. Gas station owners are not our servants. They are producers who spend money, exert effort, and assume risk to bring a product to market. They own the gasoline they sell, and like any property owner they should be free to set the terms of sale.
Since we pay the lowest price that we can find for gasoline (and never more than it is worth to us), and gas stations sell gasoline for the highest price they can get (and never less than it is worth to them), the price of gasoline is a reflection of mutually beneficial trade--the essence of proper interaction under capitalism. For a gas station owner to charge what the market will bear is no more "gouging" than it is for a computer programmer--or a cashier--to negotiate for the highest salary he can get.
Since the prevailing price of gasoline is the result of trade, it reflects not the arbitrary "greed" of gas station owners, but the facts of the market: the producers' costs, competition, and what customers are willing to pay. The reason that gasoline prices are higher after a natural disaster, for instance, is that the fact of relatively scarce supply leads various purchasers of oil and gasoline to compete to buy it, and bid up its price. Those who buy it are those who value it most, to the extent they value it most--like highly efficient factories overseas, or Americans providing for their most crucial transportation priorities.
Anti-"price gouging" laws prevent producers and their customers from trading at mutually beneficial prices--sacrificing their interests to the interests of those who wish to avoid the "hardship" of paying prices higher than they are used to. By what right can the government force producers to set artificially low prices and prevent consumers from bidding up the price to get the gasoline they are willing to pay for? By what right can the government demand that factory owners be deprived of the oil they are able to pay for--and their customers of the cheap products they happily purchase at Wal-Mart?
Anti-"price-gouging" laws are a particularly vicious form of price controls. Like all price controls, they deprive businesses of earned profit, promote shortages, and discourage future production. But they also forbid the indefinable: "unconscionable" prices, the meaning of which cannot be known until after the ruling of some bureaucrat. This added uncertainty discourages producers from being in business, period--especially in times of emergency, when "gouging" claims are most rampant. If a federal "price gouging" law is passed, will gas station owners do everything possible after the next natural disaster to remain open for business--will private contractors from other states rush to bring generators, food, and debris-clearing equipment? Or will they not bother for fear that the prices they set will be declared "unconscionable"?
The real threat to individual rights and justice is not the so-called price gouging of free individuals, but the price-control gouging of a coercive government. We must fight this threat by asserting, unequivocally, that gas station owners have a right to charge whatever prices they choose.
Alex Epstein was a writer and a fellow on staff
at ARI between 2004 and 2011.