Which is Worse: A Busted Pipeline or a Politician with a Case of the Do-Somethings?
Economists have a grumbling and cynical stereotype. This might be because even the most basic economic principles are ignored by those who should know better and vehemently denied by those who don’t.
Case in point: a restricted supply of gasoline is expected across the Eastern United States because of a busted pipeline, and state governors enact price ceilings to keep the price of gasoline artificially low.
In Alabama, Governor Bentley forbade “unconscionable prices for the sale of any commodity” in his State of Emergency proclamation.
Governor Deal did the same in Georgia. The Georgia Consumer Protection Bureau even has a Price Gouging Form, for citizens to tattle on other citizens for providing a good that is in more limited supply than usual. The website says, “Businesses may not sell motor fuel products, including gasoline, at prices higher than the prices at which those same products were offered before the declaration of the State of Emergency.”
Even first-year economics students know that when the price of a good is set arbitrarily low by government decree, the quantity demanded is greater than the quantity supplied. In other words, a shortage emerges.
The Function of Market Prices
Market prices are the result of an agreement between buyers and sellers of a good. All of the information deemed relevant by those buying and selling is incorporated into their preferences for the good. Sellers want higher prices and buyers want lower prices, but both are constrained. Buyers must outbid other buyers if they want it enough and sellers must underbid other sellers to attract buyers.
If the total stock of some good increases, buyers are only willing to pay lower prices and sellers, too, are willing to accept lower prices. This is because of the law of diminishing marginal utility. Additional units of a good must necessarily go toward the satisfaction of less urgent ends.
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