Price controls on gasoline? Bad idea.

Americans are understandably upset by the high prices they've been paying for gasoline. Many think that the cause is oil company greed and that the solution is government-enforced price controls. But price controls on gasoline are a terrible idea. They would cause shortages and lineups and would hurt producers and consumers.

Here's why. What determines the price of gasoline is the amount producers are willing to supply at various prices and the amount drivers demand at various prices. At the current price of gasoline, say $2.00, the amount drivers want to buy roughly equals the amount producers want to sell. That's why there are no gas lines. Such a "market-clearing price" evolves in every competitive market.

What happens, then, when the government decrees that the price of gasoline be no higher than, say, $1.80. The obvious answer is that consumers now can get their gas for 20 cents a gallon less. But that answer is incomplete.

At a price of $1.80, consumers will want more than they wanted at $2.00. One of the things economists are surest of is that we want more of a good when its price falls. At that lower price, producers want to supply less. The necessary result, therefore, is a shortage: the amount demanded exceeds the amount supplied.

Shortages lead to lineups. Consumers then compete with one another, not just by paying money but by spending time in line. Economists call this lost time a "deadweight loss," a loss to some that is a gain to none.

During the 1979 gasoline shortage, I calculated that the 80-cent-per-gallon price control caused consumers to spend about $1.10 a gallon (30 cents per ...