Among the lessons that I most fervently want my freshman economics students to carry with them for the rest of their lives is that prices set on markets (1) reflect the underlying realities of resource scarcities and competing human demands to use those resources in various ways, and (2) direct buyers and suppliers each to act cooperatively in dealing with those underlying realities in ways that leave as many people as possible as well off as possible. Among the most effective ways to drive this lesson home is to discuss the consequences of price controls. (Having come of age in the 1970s, I personally experienced those miserable consequences – more than once – in gasoline lines.)
Mark Perry’s recent post on prices  – pasted below in full – establishes him as the Frederic Bastiat  of our age. (My vanity compels me to boast that Mark was my research assistant at GMU in the late 1980s.)
The summer of 2012 was the third-warmest summer on record in the United States. The average temperature of 74.4 degrees from June-August this year was just one-tenth of a degree below last summer’s average temperature of 74.5 degrees, and two-tenths of a degree short of the hottest summer on record back in the Dust Bowl of 1936, according to the Weather Channel .
The extreme heat waves during the last two summers, and the hardships they have caused for millions of Americans (including 82 heat-related deaths this year), firmly establishes that we are at the mercy of a very cruel, ruthless, merciless, cold-hearted, and uncaring force: Mother Nature. Without some kind of government intervention in the market for high temperature readings being registered on existing thermostats, Mother Nature will continually and ruthlessly expose Americans to harsh summer conditions of unconscionably high temperatures. Who among us wouldn’t agree that the excessively high summer temperatures this year were a form of unfair “temperature gouging”?
To counteract the injustice of temperature gouging, let me propose a Maximum Temperature Law that will force all thermostats sold in the United States to have a maximum, reasonable and fair temperature reading of let’s say 90 degrees Fahrenheit. As part of the new legislation, all existing thermostats in homes, offices, and businesses should be immediately replaced with new thermostats with a maximum reading of 90 degrees.
Any temperatures above the 90 degree maximum will be considered to be unconscionably excessive, and will be outlawed by the Maximum Temperature Law, with violations subject to penalties, fines and possible jail time for thermostat manufacturers continuing to sell thermostats with temperature readings above the government-mandated maximum. Further, all news and weather reports, all TV and radio stations, and all newspapers and websites would be immediately prohibited from quoting any temperatures above the legal maximum of 90 degrees F.
Bottom Line: If the Maximum Temperature Law seems like a totally ridiculous solution to extremely warm weather, that’s because it is totally ridiculous. And so are price gouging laws equally a ridiculous solution to shortages and rising prices following extreme weather like Hurricane Sandy. Both solutions suffer from the same faulty logic of requiring the dissemination of inaccurate and untruthful information, about the temperature in the first case and about relative scarcity in the second case.
Just like artificially preventing a thermostat from going above 90 degrees doesn’t change the reality that it might actually be 100 degrees, preventing prices from going above a legally-mandated maximum after Hurricane Sandy won’t change the reality that many items like food, fuel, plywood, chainsaws and generators have a much higher value this week than last week. Preventing prices for essential goods from rising to their true market value will now cause distortions, shortages and inefficiencies in the market because the artificially low prices won’t accurately and truthfully reflect the reality of increased scarcity. Instead, we’ll suffer from a government-mandated fantasy world where prices are forced to be disconnected from their market fundamentals.
Likewise, imposing a maximum temperature law would create a government-mandated fantasy world about weather conditions, with a disconnect between the true temperature (e.g. 100 degrees F) and an artificial government-mandated maximum temperature (90 degrees F). And just like price gouging laws distort the market for essential goods following a disaster, so would the maximum temperature law create havoc for Americans, because thermostats would be conveying inaccurate measures of the true temperature.
When it comes to the weather, we want the most precise measure possible of the temperature, and we get that from an accurate thermostat, not from artificial, government-mandated maximum temperature laws. When it comes to maximizing the efficiency of the market for essential goods and services on the East Coast following Hurricane Sandy, what we want are accurate, truthful and precise measures of relative scarcity, and we get those from market prices, not from artificial, government-mandated maximum prices established with price gouging laws.