Let demand decide pump price

According to the Kentucky Attorney General Greg Stumbo’s Web site, http://ag.ky.gov/news/2005rel/Price%20Gouging.htm, Stumbo announced he intends to investigate and prosecute those who are “profiteering” from Hurricane Katrina.

Before he begins wasting taxpayer money and harassing gas-station owners, he should tell us what separates “profiteering” from profits.

He might suggest that profiteers make “excess” profits, exploiting natural disasters by gouging customers.

Stumbo, like many politicians, illustrates a lack of understanding about economics by attacking the business sector for raising prices and seeking more profits.

In a market economy, prices serve to instantly tell us what we must give up to get something else. Prices offer information-they’re neither good nor bad-and are determined by supply and demand.

How we distribute the scarce resources of our planet, including our precious time, is factored into the price of all goods and services.

No one forces us to buy gasoline at high prices.

We can choose to walk, ride a bike, take the bus, or carpool and some do.

Using less will reduce the demand for gasoline, and tends to lower prices.

Profits are the market’s signals to help entrepreneurs decide where to invest their time and resources.

By seeking to maximize profits, businesses create more supply, which also tends to lower prices.

Over time, the price of gas stabilizes and may start to decline.

When prices and profits fall, will Stumbo decry the gas war and resulting bankruptcies?

The alternative to allowing the market to set prices is having the government do it.

But such centralized command and control of the economy proved spectacularly unsuccessful in the Soviet Union and throughout history.

Witness the violent stampede that took place in Richmond, Virginia when the school system sold valuable laptops for $50 each.

Not only did taxpayers lose out, so did the unfortunates who were trampled.

The truth is that government officials like Stumbo can no more control the cost of gas than they can the fury of nature.

To be sure, the cost of gasoline doesn’t go down when the government artificially lowers the price.

If the government sets a price below the total cost of supplying gasoline to customers, retailers will not replenish their supplies and will allow their tanks to run dry.

As a result, consumers will appreciate lower prices but will find there is no gasoline to buy.

Stumbo suffers the fatal conceit of believing that government knows better than the market what the price of gas should be and how much profit gas stations should make.

Frankly, I don’t know why he’s so timid. Why doesn’t he just mandate gas stations sell gasoline at $1 per gallon?

Or better yet, since we live in a democracy, perhaps we should vote on how much profit gas stations should make.

The absurdity of these proposals reveals the truth: Government interference in the marketplace doesn’t solve pricing problems; it causes them.

Hurricane Katrina is a tragedy that, given time, individuals and free markets will overcome. Short-term economic disruption and price hikes cannot be avoided. Let us not compound our problems by asking government to do something it has no right or power to do. Otherwise, nature’s freak calamity will evolve into a permanent man-made catastrophe.

George Conrad Dick

Bluegrass Institute