Price "Gouging" and Economic Ignorance

President George W. Bush was quoted as saying, "I think there ought to be zero tolerance of people breaking the law during an emergency such as this, whether it be looting, or price-gouging at the gasoline pump or taking advantage of charitable giving, or insurance fraud," in a "Good Morning America" interview.

Is "price gouging" the moral equivalent of looting or insurance fraud? Looting and insurance fraud are both stealing - there is a winner and a loser. The winner is the one who steals and the loser is the one who is stolen from. A voluntary transaction where one party exchanges dollars for goods is a win-win situation. Both parties make the exchange because both parties believe that it will make them better off.

Bush continued, saying, "I would hope Americans conserve if given a choice." Well, Mr. President, that's exactly what "price gouging" does. It encourages Americans to choose to conserve, based on how much they are willing, or unwilling, to spend on gasoline. The increase in price reflects the increased scarcity. There is high demand for a finite supply. When the price rises, the quantity demanded decreases. The higher price ensures that gasoline goes to the Americans who believe it will benefit them the most.

For example, I had planned to meet a friend who works approximately 20 miles from me. Since it is not critical for me to see her today, and with gas prices around $3.00/gallon costing me more to drive 40 miles round trip, I decided to reschedule for another time. Meeting my friend for lunch was, in my assessment, a wasteful use of gasoline. Instead of taking the scenic route home, I'll just drive the most direct route. Rather than driving to a nearby store, maybe I'll walk. However, another person may have a better use for the gasoline - to transport survivors of Hurricane Katrina to Texas, for example. The higher price of gasoline is what ensures that gasoline is available to go to its highest use. There is no need for government to determine who has the greatest need for gasoline when the price system does just that. People who genuinely "need" gasoline should be thankful for so-called "price-gouging."

If only politicians were economists ...