Price gouging or shortage. Choose one.

During a weekend in Berlin, I was speaking with a few Germans who spontaneously mentioned their angst at potential blackouts and loss of heating in the months ahead. Their anxiety reflects current discussions over falling supplies of Russian natural gas against a background of the need to burn less coal, an ideological decision (post Fukushima) to shut down functional nuclear stations, and the many impacts of drought (less hydropower, problems with shipping coal on drying rivers, etc)

What bothers me is the government’s waffling around how to deal with these problems (similar to governments all over Europe) in an attempt to avoid the price increases necessary to balance falling supply with demand. These price increases are often condemned as “gouging” by the “eat-your-cake-and-have-it” crowd that cannot stand the real politiek of Dismal Scientists.

Politicians are legitimately worried that poor people will suffer with 200% increases in their energy bills and terrified that voters might punish them for failures that (mostly) have nothing to do with political decisions. (Some politicians are allowing higher prices but sending extra money to the poor; this is my advice. Others are capping price increases or sending money to all energy users, which is counterproductive and stupid.)

But the overall dynamic, it seems, is for politicians to limit price increases in order to “protect” people and hoping that some miracle of supply (Putin dying?) or demand (a majority of people voluntarily reducing use) will close the gap.

It is said that second marriages demonstrate the triumph of hope over experience, and some second marriages work. But many do not — feeding discussions and debates of “I told you so” from various in-laws.

In this case, price controls as a strategy of hope are unlikely to work, which will lead to the blackouts that many fear.

At that point, politicians will throw up their hands and say “we did our best but the world is unfair and you now have to suffer, but don’t blame us.”

This is not just cowardly, but a dereliction of duty.

Not so long ago, politicians were happy to shut down entire economies and lock people at home to stop the spread of Covid (the Chinese are still at it), so why is this different? I’d say it was because politicians were able to borrow huge sums on fighting Covid; when it comes to energy, that strategy won’t work, since more spending would just raise prices in a fight over a fixed quantity of energy. Politicians didn’t ask people to pay more for Covid (those debts come due later), and they cannot  will not ask people to pay more for energy, so they close their eyes and hope that the light at the end of the tunnel is not a speeding train.

My one-handed conclusion is that it’s better to allow price gouging scarcity pricing to avoid shortages than holding prices too low and hoping for a miracle. Hope is not a plan; using higher prices to ration energy is.

Addendum (11 Sep): The Economist has a good article on how to reduce the damage from high prices. The main points are (1) do NOT cap prices and (2) transfer money to poorer households.

  1. Higher prices will reduce quantity demanded (“walking down the demand curve”) and demand (“demand destruction”) while encouraging supply (“walking up the supply curve” as well as shifting supply out, e.g., restarting German nuclear plants). Caps on prices will encourage demand and discourage supply, leading to shortage.
  2. When it comes to helping the poor, cash transfers are much more useful, since they can use money in many ways whereas “cheap energy” only helps in a limited way.

Finally, I will add that California already made the biggest mistake (capping retail prices while wholesale prices soared) back in 2000-01. It didn’t go well.

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Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

3 thoughts on “Price gouging or shortage. Choose one.”

  1. I think you have misspelled “price gouging” (to overcharge) as “price gauging” (to… measure? prices).

    1. Yes! Shit. I suck at spelling, and this post is NOT about measuring prices 🙂

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