Wednesday, April 19, 2006

Price Gouging

Yesterday President Bush said his administration will "investigate possible price-gouging" in the gasoline market, leading my libertarian friend Jeff Miron to object.

Many economists cringe when they hear politicians talk about price-gouging. To economists, the price system is central to how market economies allocate resources. Sometimes prices need to rise to balance supply and demand, even if that outcome is politically unpopular. Talk of price gouging raises the specter of price controls, which in the 1970s led to widespread shortages and long lines at gas stations.

In the fall, I participated in a debate about price gouging with political philosopher Michael Sandel in his Justice class at Harvard, where I took the standard economist's position. For a good summary and defense of that view, see this article by journalist John Stossel.

A more charitable interpretation of the President's statement is that the government will be on the look-out for collusion among suppliers to restrict supply and raise prices. Such price fixing would be a violation of the antitrust laws. Even Miron admits that prosecuting price fixers is a reasonable governmental function.