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Stop the Political Gouging!

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Price gouging!

That’s the sound of panicking Democrats as they contemplate the prospect of going into the election with the price of gasoline rising. They are miserable about the possibility that the growing economy, on which they long have thought they would ride to victory, might turn around and bite them.

The Clinton administration tried to jawbone the OPEC countries into lowering the price of crude oil. But when that didn’t work and prices shot up in the Midwest, they turned on their favorite whipping boy, Big Oil. Vice President Al Gore, who’s touring the country to take credit for the economic growth, has called for a Justice Department investigation. The White House has now joined that call. Nothing gets headlines like a charge of price gouging against Big Oil. It’s a proven winner. The only accusation that has as much power is an accusation of collusion-which is now also officially suspected.

It’s also a Big Lie.

First of all, if the oil companies were going to gouge, wouldn’t they do it in more than a just few Midwestern states? And what a coincidence: those are the very same states in which the Environmental Protection Agency’s expensive new regulations on the reformulation of gas have recently gone into effect. It is also the region where a damaged pipeline has created a shortage. The charge of price gouging begins to look a little like an attempt to distract people from the real cause of rising gas prices.

We have another reason for doubting the price-gouging charge. There’s no such thing. What is price gouging anyway? There’s only one possible definition: charging a price that someone other than buyer and seller arbitrarily believes is too high. A seller typically seeks to maximize his revenues and sets prices accordingly. A buyer accepts a price for a product only when he values what he gets in the transaction more highly than anything else he can spend the money on. In the free market, a price mutually agreed on by sellers and buyers is the market price. No third party has grounds for objecting. If a price goes up, it doesn’t indicate “gouging.” Rather, it means conditions have changed, justifying the new price. If prices rise after demand increases or supply decreases, no one should be shocked. That’s what is expected to happen. It’s called the law of supply and demand.

What about collusion? This is an even uglier charge than gouging because it calls forth images of cigar-smoking business competitors plotting against consumers in a dark room. Let’s get something straight first: Owners of gasoline (and anything else) have the right to ask any price they please. That’s called property rights. If the price is too high, don’t pay it. Moreover, regardless of what the law says, businessmen have a natural right to talk to their competitors about prices and even to coordinate their prices. That’s called freedom of speech and association.

That said, there are some other considerations. Price agreements are typically unstable because the parties have an incentive to “cheat” and increase their profits. This happens with OPEC all the time-and they are politicians not businessmen! On the other hand, price “collusion” can be an efficient way to discover the appropriate price for the prevailing conditions. The competitive market is a discovery process; no one can know in advance what arrangement will best serve consumers.

Forcing prices higher than demand warrants would make little sense for the oil companies. When gas prices rose in the past, people switched to smaller cars and drove less. Why would the companies want to encourage us to do that again?

If the politicians want to see lower gasoline prices, they can remove the EPA regulations, the restrictions on drilling, and the taxes. That would ensure a genuine free market in oil and gas, which is in the best interests of the American people.

Actually, it’s a little strange to hear Al Gore complaining. He favors prohibitively high prices because he thinks the earth is threatened by the automobile. So why isn’t he praising the oil companies? Because getting elected president is more important than his inane environmental agenda. There’ll be time enough to carry it out when he’s safely in office.

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    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.