You’re shopping for jeans at the mall and Banana Republic is charging you twice what you would pay at Old Navy or Sears. Quick, call the government and report them!
That’s ridiculous, you say. Just take your business elsewhere. Vote with your feet.
But that’s not the advice ABC’s “Good Morning America” gave viewers of the August 8 program when it came to dealing with “panic at the pump” over an Alaskan oil pipeline shutdown.
“If you’re a consumer, be vigilant. If you see a gas station who has higher prices than every other gas station in the area, they say it’s good to report it,” correspondent Dan Harris urged viewers from a Yonkers, N.Y., gas station, citing advice from the AAA Auto Club.
While Harris seemed to be suggesting calling the authorities to report alleged price gouging, an alternative to a government investigation would be to report high gas prices to any number of gas price-watching Web sites, such as gasbuddy.com, fuelmeup.com, or gaspricewatch.com. Giving other consumers information on prices could help fuel price competition.
Indeed, the notion that price gouging is a rampant problem has been overblown. While the media have [1]often latched onto allegations of price gouging, particularly [2]following Hurricane Katrina, an extensive investigation by the [3]Federal Trade Commission (FTC) released on May 22 refuted the allegations.
In that study, the FTC found only 15 instances that appeared at first glance to fit the definition of price gouging but “regional or local market trends” accounted for the high prices “in nearly all cases,” according to an FTC press release.
What’s more, higher prices play a key role in rationing scarce goods and services and in helping to correct shortages in the long term.
“High prices might be painful, but they are the most efficient way to distribute goods in short supply. Indeed, the industry attempts to spread gasoline as widely as possible,” wrote the [4]Cato Institute’s Doug Bandow on Oct. 27, 2005, as the price spikes from Katrina were calming down.
“Quite simply: prices rise when supplies fall. That signals consumers to use less and sellers to supply more,” Bandow added, arguing that artificial price caps “short-circuit the adjustment process and intensify shortages.”
Indeed, artificially cheap gasoline can lead to prolonged shortages and hoarding, George Washington University economics professor [5]Dr. Steve Suranovic wrote in his Sept. 7, 2005, Web posting, “A Primer on Price Gouging in the Wake of Hurricane Katrina.”
Answering what would happen if gas stations kept their gasoline prices stable in light of an “impending shortfall,” Suranovic argued that “consumers will quickly learn that some stations have no gas and others are running out of gas.” Ultimately consumers “will reasonably respond to this situation by hoarding” that will “actually cause a temporary increase in the demand for gasoline,” leading stations to “run out of gas even sooner.”
The “usual cries of price gouging and demands for the government to step in and ‘do’ something” are “indicative of a strong lack of understanding” of the free market, Suranovic wrote.