Wednesday, October 19, 2011

Economics ignorance in Tennessee

in 2008, Hurricanes Gustav and Ike reduced gasoline production in the Gulf of Mexico which reduced gasoline supply to the state of Tennessee. As would occur in any well functioning market, price went up (by about $0.85/gallon). These higher prices encouraged conservation, and ensured the availability of gasoline to those who really needed it (like someone who has to get to a hospital). In the long run, higher prices during emergencies give incentives to suppliers to alleviate future shortages.

Unfortunately, in Tennessee and 30 other states, such higher prices are also illegal: the state prosecuted 17 firms for raising price.

 It is not clear whether the suits were caused by overzealous enforcement or by the vague statute which prohibits increases “grossly in excess of a price generally charged." Any economist could build an argument that such enforcement is immoral using a consequentialist ethic, but it also seems to fail on simple deontological grounds:
It is the special claim of the virtue argument that it intends to promote a civic virtue of shared sacrifice for the common good, yet price gouging laws are destructive on both points. Because price gouging laws interfere with price signals, resources from outside of the disaster-affected area are not so readily mobilized. Rather than promoting a shared sacrifice in response to a disaster, economic damage tends to be more localized. A further result of interfering with price signals is that fewer resources get to where they are most needed, and therefore the common good is harmed rather than promoted.
The naive reaction to higher prices following an obvious supply decrease seems to represent an embarrassing failure of economics education in the state of Tennessee. Perhaps we need a "competition" day, as they have in Europe, so that we can spread the good news of markets to state legislators and those who enforce the law.

1 comment:

  1. I am reading your book and notes. You argued that price controls destroy wealth. I agree with part of your idea, but I think price control is necessary and can also create wealth.

    Use the real estate price in China for example. Without the price control from the central government, group of rich people with properties tend to blow the price higher and higher, which makes young generations difficult to buy their own apartment. These young talents will leave the big cities, such as Shanghai, just because they can’t afford the living expense, so, in that way, the city will suffer from the loss of human capital, which reduce the creation of wealth contributed by these young guys.

    Yi Gu