Potential Effects Of Proposed Price Gouging Legislation On The Cost And Severity Of Gasoline Supply Interruptions

The rise in gasoline prices that followed the devastation caused by Hurricanes Rita and Katrina has led to proposals for federal “price gouging” legislation. This paper analyzes the potential economic costs of such proposals in light of the experience gained from prior episodes of gasoline supply interruptions and efforts to impose price controls. Studies of previous spikes in the price of gasoline, including those after Katrina and Rita, have consistently found that price increases were due to the normal operation of supply and demand and not price manipulation. Studies of gasoline price controls find that neither consumers nor the economy benefit, because the apparent monetary savings to consumers are transformed into costs of waiting or other forms nonmarket rationing that exceed the monetary savings. Price controls also make shortages worse by reducing the incentive to provide additional supplies. We apply these lessons to estimate the additional economic cost that would have been incurred had price controls like current legislation been in effect after the hurricanes, and conclude that economic damages would have been increased by $1.5–2.9 billion during the two-month period of price increases.