Gas Gouging

At 11:25 Thursday night, the Senate passed a bill barring "price gouging" on the sale of crude oil, gasoline, or petroleum distillates. One version of the bill under consideration defined price gouging as "the charging of an unconscionably excessive price by a supplier in an affected area." Recognizing, as senators, that matters of conscience are, well, matters of conscience, the senators went on to describe such a price as, among other requirements, one that "grossly exceeds the price at which the same or similar crude oil, gasoline, or petroleum distillate was readily obtainable by other purchasers in the affected area." The House of Representatives, which has already passed similar legislation, may take up the price-gouging bill again as soon as this week.

We'd offer our own objections to the futility of this exercise in congressional price-setting, but the chairman of the president's Council of Economic Advisers, Edward Lazear, has beat us to it. Mr. Lazear has impeccable credentials: a Ph.D. in economics from Harvard, he is on leave from his job as a professor of economics at Stanford. In a white paper released by the White House, Mr. Lazear warns that the bill "will harm the economy generally and specifically will harm drivers — the very people the bills are intended to protect. The approach contradicts standard economic principles."

Mr. Lazear offers two main arguments. First, he warns that such legislation "that effectively places controls on prices exacerbates shortages and potentially increases lines at gasoline stations." Second, he warns that "The difficulty in defining ‘price gouging' would create an unnecessary regulatory regime with potentially high litigation costs and great uncertainty for sellers, enforcement agencies, and the courts. These added costs and uncertainties would deter investment in new supply, increasing prices in the long run."

Mr. Lazear offers as an example the long gas lines of the 1970s, and contrasts them with the situation today. "In recent years with flexible prices, oil price increases of similar magnitude have been accompanied by gasoline availability," he writes.

Finally, he appeals to the wider principle: "legislation such as this is effectively a price control and would set a bad precedent for the government's involvement in the market. A wide variety of economists have found with both empirical research and practical experience that these policies do not work. Long experience has shown that allowing the market to set prices — the principle that forms the basis of our Nation's free-market system — is the most efficient and effective method to allocate scarce resources."

Wise words. President Bush may want to share them with his department of energy, which maintains on its Internet site a form asking ordinary Americans to report their local gas stations "if you believe there may be price-gouging, or price-fixing," and promising to transmit the complaints to "the Federal Trade Commission, U.S. Department of Justice and individual State Attorneys General for investigation and prosecution where appropriate." This, before the Democratic Congress even passed the law against price-gouging. In the meantime, if the Democrats are so concerned about the high price of gasoline, they could start by repealing the federal gas tax, which is 18.4 cents a gallon. We'd sure like to see the senators defending that one in court against a claim that it is "unconscionably excessive."