After hurricane Sandy caused immense damage to the Eastern United States government officials moved in to prosecute price gougers. Anybody caught charing higher prices for goods faced prosecution and punishment by the state. What did this prohibition against raising prices lead to? Shortages. Many desperately needed goods, including gasoline, have been in short order. These shortages could have been avoided though if sellers were allowed to adjust their prices to match supply and demand:
Had gas stations been allowed to raise their prices to reflect the increased demand for gasoline, only those most in need of gasoline would have purchased gas, while everyone would have economized on their existing supply. But because prices remained lower than they should have been, no one sought to conserve gas. Low prices signaled that gas was in abundant supply, while reality was exactly the opposite, and only those fortunate enough to be at the front of gas lines were able to purchase gas before it sold out. Not surprisingly, a thriving black market developed, with gas offered for up to $20 per gallon.
Thank the gods for the “black” market for without it there would be no gasoline anywhere. The need for a “black” markt wouldn’t exist if the state didn’t prevent sellers from raising their prices to match the increase in demand. Furthermore the price of gasoline would likely be lower than it is now because “black” market entrepreneurs increase their prices partially in response to the risk they face. Anybody selling goods on a “black” market must make enough profit to outweigh the risks of being caught and punished by the state. Additional risk tends to transform into additional costs for consumers.
When the state implements prohibitions against raising prices they cause shortages.