Why Price Controls Don't Work

When prices spike as they have with gasoline, lawmakers who don’t understand the free market think enacting price controls will solve the problem. In reality, price controls do the opposite, as the lawmakers in Hawaii learned the hard way:

Hawaii’s gasoline price controls have sputtered to a stop. The island state whose drivers pay the highest pump prices in the nation has given up on price caps after an eight-month, first-in-the-nation experiment. Some complained that the restrictions actually led to higher prices, because oil companies knew they could charge up to the maximum allowed.

“In a lot of people’s minds, they thought the gas cap wasn’t working,” said Republican state Sen. Paul Whalen, a strong supporter of the price controls. “It was hard to generate lots of support for it because we’re paying more than we ever were before.”

Gas is particularly expensive in Hawaii because of high state taxes and because of the costs of transporting oil across the Pacific. Last fall, Hawaii became the only state to cap the cost of fuel to try to give some relief to motorists.

Under the price control legislation, Hawaii set weekly caps on wholesale gas prices. Those caps were based on the average of prices in Los Angeles and New York and on the Gulf Coast. Then allowances were added for what it costs wholesalers to ship to Hawaii and distribute gas to more remote islands.

But there was no cap on the markup added by gas stations.

With regular gasoline climbing past an average of $3.38 per gallon in the past few weeks, lawmakers sent Republican Gov. Linda Lingle a bill last week to suspend the controls. She signed it on Friday.

When will lawmakers learn? Price controls never work. As the citizens in Hawaii realized, they were paying more for gas than they ever did. Additionally, price controls discourage the production of a product while encouraging its consumption, creating shortages.

In a free market, the price fluctuates based upon supply and demand, which means that when a product is plentiful and demand is low, the price is low. If a product is limited but demand is high, the price goes up, ensuring that plenty of that particular product is available for purchase.

According to the state’s Department of Business, Economic Development and Tourism, Hawaii’s motorists spent $54 million more on gas because of the price controls.

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