Simple Economics

The insanity that erupts whenever the price of gas goes higher is always a source of amusement to me. The simple laws of supply and demand are so simple to understand that even politicians can understand. Well, maybe not:

WASHINGTON -- Some folks are ignorant about economics but know some history. Others know some economics, but lack historical memory. Then there are politicians.

In response to rising gasoline prices induced by Hurricane Katrina, Rep. Louise Slaughter (D-N.Y.) has proposed "the Emergency Petroleum Allocation Act."

...As any first-year economics student could tell you, price controls do not solve emergencies -- they create new ones. When demand for a good rises, the price for that good will also rise. The rise in price is a signal to suppliers to put more resources into supplying that good. Price controls limit the ability of suppliers to do so, but do nothing to stem the rise in demand. With the demand unchanged, but the supply restricted, the result is a shortage of that good. That's exactly what happened with gasoline in the 1970s. Or so I thought before reading Congresswoman Slaughter's letter:

Am I happy that prices are up for gasoline? Hell no. Mostly because I don't own any petroleum stocks. It does effect my business, but as a business owner I'm forced to either suck up the extra cost, or pass it on to my customers. Eventually the price will settle into the $1.90 a gallon range or lower and this will all calm down until the price goes up next Summer.

Foes of the capitalist system will scream and call for price caps and the like every time the lprice goes up on anything. It makes for a great sound byte, but it also makes for horrible policy.