Gouge and Counter-Gouge

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First we had the conventional wisdom that price gouging of gasoline during national emergencies was a bad thing. Hence, twenty states have anti-gouging laws on the book. Then along came the counter-wisdom that, no, no, raising gasoline prices during supply shortages was actually a good thing, as it reduces demand and helps avoid rationing (which can hurt the poor even more than long lines do). But now Dave Hoffman brings us the counter-counter-wisdom, suggesting that those twenty states actually do have the right idea in passing anti-gouging laws:

In civil emergencies, markets don’t work to clear information in rational ways. Even high prices will not serve to reduce demand for, say, water and gasoline, over the short term if folks think their lives are going to depend on having such commodities nearby. Price gouging regulations do two things to reduce panic and regulate demand. First, they increase trust in market transactions (an SEC-like role) and thus will act to reduce “panic demand” in emergencies without increasing price. Second, the regulations – when publicized appropriately – have the same information forcing effect as higher prices themselves, teaching people that there are supply interruptions and they should change their use patterns until conditions improve. In both ways, price gouging regulations use norms and soft-economics to accomplish market stabilization in a more satisfactory way than the market would, if left to its own devices.

Interesting argument, if true. On a related note, the Foundation for Taxpayer and Consumer Rights has put out a new study trying to figure out the rise in gas prices, although “gouging” is obviously difficult to prove. In California, for example, the price of gasoline rose 65 cents between January and April of this year, while profits from refining operations rose 61 cents. Refinery profits seem to be outpacing the rise in price of crude oil, and “no public evidence exists” that the cost of a) refining oil, or b) transporting refined products has jumped over the past four years for these refineries. The steady uptick in the cost of California gas appears to be explained primarily by increased refinery exports of motor fuel abroad, which reduces domestic supply at a time of heightened demand. The state of California, of course, levies a 7.25 percent sales tax on every gallon of gas sold at the pump—a tax that brings in considerable revenue—so the legislature has every incentive to maintain high gas prices. (In Slate, Daniel Gross points out that refining industry has also benefited massively from various regulations, as well as the under-supply of refineries, and will reap big fat profits from Katrina.)

Moving right along, the Center on Budget and Policy Priorities argues that most states shouldn’t suspend their gas tax right now—taxes that are usually a fixed amount, rather than a percentage sales tax as in California—since that tax cut will likely be passed on to refiners rather than consumers. Plus, states need the revenue right now, especially since the high price of gas is hurting local governments as well, and there are more effective ways of easing the strain on consumers’ pocketbooks (such as low-income heating assistance).


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