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November 11, 2005
The Post Nails it
Russell Roberts
Unlike the editors of the NYTimes editorial page who think that high prices and profits have no redeeming social value, their counterparts at the Washington Post (rr) nail the economics:
When oil prices spike, it is because of scarcity -- for example, scarcity caused by hurricane damage to petroleum infrastructure on the Gulf Coast. The best way to manage that scarcity is for producers to make a special effort to get oil to the market and for consumers to make a special effort to cut back. Higher prices encourage both of those responses; rather than complain of price gouging, Congress should celebrate price signals. By contrast, controlled prices create no pressure for extra production or conservation. They just create gas lines: Witness the 1970s.
A tax on windfall profits is less counterproductive but still bad. For one thing, it's not as though the profits are socially useless. Even in the absence of a special tax, they generate regular tax revenue for both federal and state governments as well as dividends for retirement plans. For another, the profits are a spur to new investment; taxing them reduces the return that companies will expect to make on new oil finds or refineries, with the result that there will be less oil and gas available in the future and hence higher prices.
The title of the editorial is the lovely, "A Call to Inaction."
Posted by Russell Roberts in Prices | Permalink
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