The Southeast is experiencing a temporary gas shortage due to last week’s hurricane in the Gulf states. The effect has been long lines at the pumps, gas stations running out of gas, and a huge amount of anxiety for the residents of Georgia, Tennesee and the Carolinas.

Twitter is a-twitter with information about gasoline availabilities in the Atlanta area with messages like these:

“BP on Roswell Rd in Sandy Springs has gas, 40+ car line, cops and an ambulance present”

Costco sandy springs is now out of gas”

I was just told by phone Costco Dunwoody has gas. 90 mins wait. Members only”

I’m searching for gas near cumberland mall or ponce and moreland or anywhere in between, Thanks!”

Bloggers have also related their experiences:

I have been looking all around for gas and I have already called my boss and told him that I might not be able to work tomorrow. I also might not get to see my daughter this weekend. Thanks Gov. Perdue! Your delayed reactions have costed you my vote. – Helpless

When this gas crisis first hit a week or so ago, I didn’t rush out and fill my tanks or engage in any of the so-called “panic” behavior. This past weekend, my small, rural hometown ran completely out of gas. Closest station with gas was 18 miles away. Luckily, I had some gas in a jug that I keep for my lawnmower. Lesson learned. Now, whenever I get below a half tank, I’m topping off. – Lee

Two hours, six gas stations, and two $25-fill-ups later, I have a full tank for the first time in two weeks. Now I understand why other people have been topping off every chance they get…. – concerned

Why does a shortage warrant raising of the prices??? I see where some stations are going to be investigated, but who is investigating why it is still over $4 a gallon?? – cin

The curious thing is that all of this waiting, panic, and anxiety is completely unnecessary if people could simply understand and accept the functioning of a free market. The market, however is not free in these states because the governments have imposed price gouging laws to prevent service stations from raising their prices when supplies are lower than normal. Indeed, in Georgia alone 1300 price gouging complaints have been filed and 130 service stations are under investigation.

The market solution is simple: allow service stations to charge whatever they want. Yes, allow them to “price gouge”! If they were allowed to do so, here’s what would happen.

First, as soon as service stations learned that they would not be receiving the same frequency of gas shipments, they would immediately raise their prices. Each station’s objective would be to reduce demand so that the supply they have remaining would last until their next shipment. They would also make more money per gallon, but given the shortage they will be selling less gas over the week too. And yes, it will maximize their profits.

When supply conditions change suddenly and unexpectedly the stations will not be sure what price to set. Ideally they would like to set a price such that the last gallon of gasoline in their storage tanks is sold just as the tanker truck arrives to fill them up again. But this will be difficult to do. A higher price will normally reduce demand, but by how much will be greatly uncertain. It will also depend on what the prices and supplies are among competing stations in the neighborhood. If other stations increase by more, one station may even see its demand increase despite a higher price. If this happens the station should respond by raising its price even more to moderate its sales. If demand falls too much they should adjust downward. The greater the uncertainty, the greater the volatility in the prices.

Some firms may overreact relative to their competitors. Maybe a station will raise its price to $8 a gallon. What to do about this? As the Beatles would sing: “Let it Be! Let it be-ee! Let it Be! Let it Be!” A station that greatly overprices will discover it has no demand, since there will be other stations open with cheaper gas. Eventually one of two things will happen. Either , this high priced station will recognize that a new gas shipment will soon arrive and to make any profit at all, will be forced to lower its price, perhaps below its competition for awhile. Or, this station will watch as those firms who underpriced run out of gasoline and people are forced to buy the $8 gas. If the latter happens this high priced station, and others like it, will be the ones that provide the greatest public service. That’s because if shortages are that significant, these stations will be the ones that assure that there will always be a service station open and everyone will always be free to go in and buy as much as they like.

What’s the effect for consumers. Well, undoubtedly they will pay more for gasoline and they won’t be happy. But, the higher price will cause many of them to reduce their consumption. Especially in this case, because the supply disruption is expected to be temporary, those who don’t absolutely need to fill up, won’t. Those who only need a little gas, will fill up a little, also waiting for later when the price will go down. But the most important effect for consumers is that if the stations are allowed to raise their prices to whatever they want, then there will always be open gas stations and there will be no lines. For everyone with an unexpected emergency, for example a person with a parent that suddenly becomes ill across the state, they will at any moment, day or night, be able to find a station that’s open and be able fill up their tank. With no lines consumers will not have to consider the what if question: namely what if there is no gas tomorrow or next week when I really need it?

Because of the lines and the closed stations, all the consumers in the southeast are asking that question today. And, because the market doesn’t work right, they are responding by filling up their tanks every chance they get and filling up gas cans on top of that … all of which makes the situation worse. They’re behavior, which is perfectly rational and reasonable given the situation, causes stations to run out of gas, creates lines at every station that is open, and raises the anxiety and in some cases the panic among the population.

So, the solution to the chaos is simple. Eliminate the price gouging laws and leave the firms free to charge whatever they want. By doing so, the government and the service stations would be providing a public service; namely the elimination of wasteful gas lines and its associated anxiety.