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October 19, 2001

Ignorance Isn't Bliss When It Comes to Gas Prices

Soon after the end of World War II, the story goes, the newly elected President of the Philippines was frustrated when his advisors told him that his country's economic growth was constrained by the laws of supply and demand. "Why don't we repeal those laws?" he finally exploded. The events of recent months have demonstrated that our level of economic sophistication these days isn't really much higher than what was revealed by this comment more than fifty years ago. As we grapple with problems like urbanization, environmental quality and world security, this shortcoming looms as a major obstacle to coherent and forward-thinking policies.

Our recent episode with retail gasoline prices on the day of the September 11 terrorist attacks is a case in point. Given the sensitivity of our motorized population to upticks in gasoline prices, the public anger provoked by stories of five dollars per gallon prices charged by a few individual gas stations was not surprising.

But to see that public outcry joined by leading state politicians, and by the editorial boards of some newspapers around Indiana, was saddening. The opportunity to lend an element of reason to an emotionally charged debate was lost. Deploring the "greedy" behavior of "gouging" gas station owners is almost a public sport in this country. But it is also an act of hypocrisy.

First, let's settle the matter of why gas prices spiked on the day of the attacks. When large numbers of us get into our cars at the same time to top off our tanks, it snowballs into a large increase in demand seen by individual station owners, and a rapid depletion of their stocks available for sale. What's the best way to ration dwindling gas stocks to the long lines of thirsty cars?

You guessed it -- raising prices. Adjusting prices to equate demand with supply is the fundamental mechanism of any market economy. And the event that precipitated the whole affair wasn't the greed of station owners, but the jitteriness of consumers.

After all, gas stations don't have a monopoly on greed. In the marketplace, we are all looking out for our own interests. Are you greedy when you drive by the station on the corner to fill up at the lower priced one a mile down the road? Or when you change jobs to make more money? Or when you sell your house for more than you paid for it?

This goes down hard for some, who cannot see beyond the windfall profits that can result when changing market conditions make assets suddenly more valuable. And there is certainly a strong flavor of Robin Hood-style social justice at work in the Attorney General's high profile prosecution of those unlucky few gas stations who were caught obeying the laws of supply and demand. But those who applaud such efforts in the name of fairness might want to pause to consider where such policies might lead.

For in the spirit of fairness, does not the confiscation of windfall profits when prices shoot up require the dollars to flow the other way when prices are depressed? And how are we to judge when price movements merit such action?

Even more fundamentally, however, we ought to have a better notion of where prices come from in the first place. A surprising number of people seem to feel that businesses can raise their prices at will, and it is only the collective outrage of customers or the threat of legal reprisal that holds them at bay. Walking a hundred feet in the shoes of a small business owner, of course, would quickly put that notion to rest.

Link to this commentary: https://commentaries.cberdata.org/452/ignorance-isn-t-bliss-when-it-comes-to-gas-prices

Tags: prices and inflation


About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. He served previously as Director of the Bureau of Business Research (now the Center for Business and Economic Research) at Ball State University, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

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