Almost all actions of politicians have unintended consequences. In times of tragedies their mistakes are amplified. Last week, before during, and after “Super Storm” Sandy hit the northeastern United States, governors and attorneys general in that part of the country put out blanket warnings that violators of so-called anti-price gouging laws (laws meant to protect consumers from excessive pricing of essential goods and services during emergencies) would be thoroughly investigated and brought to justice for violations. While these actions may be reasonable to the emotional observer, when one applies economic logic to the circumstance it is easy to understand how anti-price gouging laws have actually caused the current gasoline shortages in the Northeast.
In essence, anti-price gouging laws are price controls. That is to say, they prevent suppliers of goods from charging market prices if those prices are deemed excessive by government. Needless to say, since suppliers are not in the business of losing money, when the price of any good exceeds a government mandated maximum price, suppliers will stop supplying that good. They obviously are not going to sell an item at a loss as that is a sure recipe to put yourself out of business. Consequently, a shortage of that good develops. We have seen this happen time and again most notably with beef during the Nixon price controls in the early 1970s and rental properties in New York City under rent controls.
So how does this apply to the current gasoline shortages experienced by motorists in the Northeast?
Faced with threats by state officials including reductions in profits, fines, directives to set up reimbursement funds, and other penalties, merchants were intimidated to comply with the anti-price gouging laws. Consequently, a critically important market mechanism was prevented from kicking in: namely, rising prices in the face of potential shortages caused by disruptions to market flow.