Tuesday, September 13, 2005

Cantwell Dunce of the Week

We are all bothered by the even higher price of gasoline this week. Can't someone do something about it? Two actions can improve it: 1- increase the supply of refined gasoline, or 2- decrease the demand for it. Enough of either will bring the price down. Can a US Senator increase the supply or decrease the demand? I haven't seen one do it. But Senator Maria Cantwell has another course of action: price controls. Both the theory and the experience of economics show what happens when the price is limited in the absence of actions 1 and 2 - you get a shortage. It has happened every time. Wikipedia In 1973 price controls resulted in rationing and line ups at every gas station and gimicks to reduce them, such as alternating days by even-odd license plates to match the numeric day of the month. Jeff Jacoby says it well:
There is only one rational and efficient way to allocate a scarce commodity: through price. That is because the more a person values something, the more he is generally willing to pay for it. By charging what the market will bear -- for gasoline or anything else -- vendors channel their product to the customers who value it the most. A mandatory cap on the price of gas may seem like kindness to the poor, but all it will do is raise demands that can't be met. The result will be "Sold Out" signs on Joe's pumps, or gasoline lines stretching around the block.
Painful as they are, price spikes are invaluable -- especially after a disaster, when critical goods and services are at a premium. At $3 or $4 a gallon, post-Katrina gasoline prices are transmitting two urgent messages. To consumers they say: "Conserve! Buy only as much as you really need, and look for ways to use even less." To the energy industry they say: "Produce! Get those refineries back online and supply more gasoline ASAP." Aren't those exactly the behaviors we want to encourage? But the power of market pricing to affect behavior is unwelcome to those who think useful things don't happen unless the government tells them to happen. In The New York Times last week, Senator Levin dismissed the idea that higher prices will induce consumers to use less gasoline. "By that logic," he snorted, "you could raise prices to $10 a gallon and you make sure that people walk." In the real world, though, consumers do make choices based on price, as the large photo accompanying the Times story illustrated nicely. It showed a woman turning away from gasoline pumps charging $5.88 a gallon. The caption read: "The price of gas at a station in Stockbridge, Ga., last week was too high for one customer, who returned to her car without buying."
Back to Cantwell. Rich Karlgaard of Forbes Magazine honored her as
Dunce of the Week
for this brave proposal. Actually she isn't the only one! Two more US senators and the governor of Hawaii share the "Dunce" award. See also No Price Gouging.

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