Price Controls At The Pump Are A Terrible Idea

25 Aug, 2005 by John Hawkins

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After the disastrous gas lines of the seventies & the much publicized rolling blackouts in California, which were both caused by price controls, you’d think that people would finally start to figure out that the laws of supply and demand cannot be changed by government decree.

But unfortunately these lessons appear to have been lost on Hawaii’s governor, Linda Lingle (R), who has decided to place caps on wholesale gasoline prices.

Let’s take a moment to explain why price controls on gas are a bad idea.

Normally, the cost of gasoline is determined by supply and demand. As the price for gas rises, demand tapers off. For example, as gas prices go up, some people will decide to drive less, others will car pool, and others will use public transportation. This actually helps keep costs down by lessening demand.

However, when the government interferes with gas prices in the form of price controls, it causes the market to go haywire. Because costs paid by consumers are artificially low, demand is going to be higher than it should be.

Moreover, because producers are being paid less than their product is worth because of price controls, it’s likely to cause a reduction in supply. For example, if you had a choice between making 5 cents a gallon selling your gas in Hawaii or 25 cents a gallon in the rest of the US, you’re going to strongly prefer to sell your gas some place other than Hawaii. Moreover, if you actually lose money selling your gas in Hawaii, you’re going to try to avoid selling gas there all together.

So, what will end up happening eventually is a level of demand for gas that’s significantly higher than it should be and a supply of gas that’s significantly lower than it should be. That leads to shortages. As a matter of fact, price controls were exactly what led to long waiting lines for gasoline in the late seventies.

There’s nothing surprising about that. As Thomas Sowell has noted, this is a pattern that has repeated over and over throughout human history

“Shortages where the government sets prices have been common in countries around the world, for centuries on end, whether these shortages have taken the form of waiting lists, black markets, or other ways of coping with the fact that what people demand at an artificially low price exceeds what other people will supply at such prices. This principle is not limited to medical care. There were waiting lines for food, undershirts, and all sorts of other things in the Communist bloc countries in Eastern Europe before the collapse of Communism in that region. You had to get on a waiting list to buy a poorly made car in India before they began to free up their economy from government controls. You could go back literally thousands of years and find shortages under price controls in the Roman Empire or in ancient Babylon. But it is still front-page news today because elementary economics has not yet sunk in.”

Linda Lingle and her constituents in Hawaii should know better.