| Lesson 10: Price Gouging and Price Control |
Among the many confused and liberal statements of former President George W Bush were two
contradictory statements that he made around the time of Hurricane Katrina:
1. He was not going to allow so-called "price gouging."
2. He was not going to create price controls.
They are contradictory because the defining of, and subsequent prohibition of price gouging is the same
thing as price control, just as affirmative action is the same thing as a quota system.
There is a difference between a price and a value. A price can be set, a value can not. Individual
merchants initially set and control their own prices. However in a free market, the two opposing forces of
competition and greed rapidly force prices to be adjusted until they reflect the true value of the item or
service. The value of something is ultimately determined by only two things: the need or desire for it
(demand) and the availability of it (supply).
The Free Market system is simply the environment where people trade freely: setting whatever prices we
like and getting whatever profits we can. Never in the history of the world has there been a more efficient
and more exact system for distribution of goods and services than the Free Market. Letting millions of
people do what they want results in millions of tiny adjustments being made in the flow of resources, all
before the Secretary of Commerce can get out of bed. There is no computer and no committee that can
duplicate this process.
Unfortunately, prices can also be set by government. Government can affect prices in two ways. One is
to affect the price of everything by printing more or less money. This does not affect the sensitive,
free-market distribution of resources because prices stay proportional to their value.* The other way is to
pass a law that sets an artificial (and therefore arbitrary) price limit. This is price control.
Price control separates price from value. It thereby changes the distribution of resources from a system
based on need and availability, to a system based on standing in line and waiting your turn. We recognize
these lines in millions of waiting rooms and emergency rooms, where Medicare and Medicaid set price
control. In cities that enforce rent control, we see lines of homeless people huddled in the doorways of
abandoned buildings. We remember the lines at gas stations in the 1970's, caused by President Carter's price
controls. And we remember hearing about the bread lines in the Soviet Union, a nation where everyone,
except those with political connections, stood in line for everything. In Cuba, they still do.
Price control causes shortages in two, related ways. It restrains profit seekers and un-restrains value
seekers.
1. It removes incentive for large profits that is required to motivate a shift in resources towards a rising
need. A classic example is Hurricane Katrina, where fear of price gouging laws prevented profit-seekers
from providing adequate supplies.
2. It removes a natural, regulatory effect on demand. In a free market, when demand exceeds supply,
prices go up which causes demand to come down. Under price control, value seekers (or bargain hunters)
will continue to consume a dwindling supply until it is all gone. Consumers can be greedy too. Examples
are listed above.
Next Lesson: Why Are Prescription Drugs So Darn Expensive?
*There is one notable exception: Inflation affects the value of loans that are made without contractual inflation adjustments. That
causes the bank to lose wealth. The only way for the bank to compensate is by raising interest rates, which in turn reduces the
lending supply.
contradictory statements that he made around the time of Hurricane Katrina:
1. He was not going to allow so-called "price gouging."
2. He was not going to create price controls.
They are contradictory because the defining of, and subsequent prohibition of price gouging is the same
thing as price control, just as affirmative action is the same thing as a quota system.
There is a difference between a price and a value. A price can be set, a value can not. Individual
merchants initially set and control their own prices. However in a free market, the two opposing forces of
competition and greed rapidly force prices to be adjusted until they reflect the true value of the item or
service. The value of something is ultimately determined by only two things: the need or desire for it
(demand) and the availability of it (supply).
The Free Market system is simply the environment where people trade freely: setting whatever prices we
like and getting whatever profits we can. Never in the history of the world has there been a more efficient
and more exact system for distribution of goods and services than the Free Market. Letting millions of
people do what they want results in millions of tiny adjustments being made in the flow of resources, all
before the Secretary of Commerce can get out of bed. There is no computer and no committee that can
duplicate this process.
Unfortunately, prices can also be set by government. Government can affect prices in two ways. One is
to affect the price of everything by printing more or less money. This does not affect the sensitive,
free-market distribution of resources because prices stay proportional to their value.* The other way is to
pass a law that sets an artificial (and therefore arbitrary) price limit. This is price control.
Price control separates price from value. It thereby changes the distribution of resources from a system
based on need and availability, to a system based on standing in line and waiting your turn. We recognize
these lines in millions of waiting rooms and emergency rooms, where Medicare and Medicaid set price
control. In cities that enforce rent control, we see lines of homeless people huddled in the doorways of
abandoned buildings. We remember the lines at gas stations in the 1970's, caused by President Carter's price
controls. And we remember hearing about the bread lines in the Soviet Union, a nation where everyone,
except those with political connections, stood in line for everything. In Cuba, they still do.
Price control causes shortages in two, related ways. It restrains profit seekers and un-restrains value
seekers.
1. It removes incentive for large profits that is required to motivate a shift in resources towards a rising
need. A classic example is Hurricane Katrina, where fear of price gouging laws prevented profit-seekers
from providing adequate supplies.
2. It removes a natural, regulatory effect on demand. In a free market, when demand exceeds supply,
prices go up which causes demand to come down. Under price control, value seekers (or bargain hunters)
will continue to consume a dwindling supply until it is all gone. Consumers can be greedy too. Examples
are listed above.
Next Lesson: Why Are Prescription Drugs So Darn Expensive?
*There is one notable exception: Inflation affects the value of loans that are made without contractual inflation adjustments. That
causes the bank to lose wealth. The only way for the bank to compensate is by raising interest rates, which in turn reduces the
lending supply.