Wednesday, September 07, 2005

"Law Gouging"

It should seem pretty obvious to most people, but oil companies sell oil. Oil companies are not non-profit institutions or charities. Their only goal is to obtain the highest profit possible.

But some politicians believe that oil companies have a different job and make statements similar to the following:
"There are growing concerns that oil companies are making too much in profits at the expense of consumers," said Sen. Pete Domenici, R-N.M. (CNN article)

I'm glad that they are. It means the oil companies are doing their job -- nothing more, nothing less.

The problem that politicians fail to answer is what profit is not at the "expense of the consumer" and how much is "too much" profit? Oil companies are not able to charge any price they want. They are constrained by demand. It doesn't matter if oil companies are a single monopoly, an oligopoly, a price taker or price seeker; they will only charge what people are willing to pay. If they decide to raise their price too much, they will notice a drop in profit and will lower the price to increase revenue. When politicians allege "price gouging," they ignore a few fundamental economic principles and principles of property rights. 1) No company has to be in business. For whatever reason, a company always has the right to close its doors and stop selling its goods or services. 2) Companies are in business to make as much money as possible. They are not in the charity business and their only "social responsibility" is to make profit. Any charity a business conducts is of its choosing, and not out of obligation. 3) Companies always operate as profit maximizers. When we observe a change in price in a profit-maximizing firm, it is a reflection of a change in demand. It doesn't mean that the company cared about consumers before, but has now become greedy. The company always wanted the consumers' money and as much as it could get. 4) Consumers do not have to buy _________ (fill in the blank, because any good fits). For example, consumers do not have to buy gasoline for their cars, but do so because it is cheaper than walking or moving closer to their office. Any transaction between companies and consumers is voluntary.

Here's the irony: the same politicians that criticize oil companies for profiting from voluntary transactions don't make the same harsh judgments about farm subsidies. Why don't we hear them say, "There are growing concerns that farmers are making too much in profits at the expense of taxpayers" -- the taxpayers who did not want their money taken and given to farmers and who received no goods in exchange? Yet in the same article from which the first quote was taken,

"Grassley, R-Iowa, said he favors loan relief for farmers whose grain harvest may not reach market on schedule because of difficulties at the New Orleans port. Sen. Max Baucus, D-Mont., called for help with Medicaid costs in states that take in storm victims. Sen. Ted Stevens, R-Alaska, said he favors tax relief for airlines hard hit by a spike in fuel costs.

In the House, DeLay said the GOP leadership hoped to have legislation on the floor this week dealing with Pell grants, reducing red tape for the newly unemployed and making it easier for FEMA to transfer money to private organizations."

Price gouging? Maybe we should be talking about law gouging. It sounds like oil companies aren't the only ones taking advantage of the recent disaster in New Orleans and Mississippi, as politicians seek more and more tax dollars and new policies. Rather than fearing profits made by oil companies, maybe there should be "growing concerns that politicians are making too many laws at the expense of consumers and taxpayers."

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