A near daily post lets me address topics that I’d not think worthy of my monthly articles, either due to general interest, space, or some other reason. This is one such topic.
When gasoline started its recent climb, I soon heard of some congress people who missed much of their economics 101 class. They called for anti-gouging rules which to me sounded a bit like price controls which we know do not work. Let’s go back to the lecture on supply/demand for a moment. There is a supply curve (here shown as a line), showing that the manufacturer will be willing to supply ever increasing quantities of a product as the price offered rises. That actually stands to reason, doesn’t it? On the other side, we have the demand curve. The consumers, taken in aggregate, will want ever increasing quantities of a product as the price falls. Of course, there are limits at the endpoints, if milk were cheaper, it might reduce juice consumption (a phenomonon called cross elasticity of demand) , but at some point, even free milk could only generate so much demand. We are looking not at these extremes, but at the current point where the market clears.
In the case of any product, the natural clearing price is at B, where the supply and demand lines intersect. Now, what would happen if prices were capped by the government? At the artificial government maximum, there is a demand (C) and supply (A) which do not match. At best, that sounds like long lines for gas, but worse, it sounds like gas stations shutting down for a long vacation. Just my overdue thought on this. Shortly after this all occurred to me, Gene Epstein (of Barron’s) wrote with similar thoughts.