We frequently hear comments such as “Oil companies are making too much profit”, or “Insurers make too much profit”, or more generically “Business is greedy and makes too much profit”.
In a ‘free market’ statements such as these are totally ridiculous!
In a free market, the consumer has choices and will only buy a product when that product offers a satisfactory ‘value’. The seller cannot dictate his own ‘profit’, he can only seek to make his product more attractive in one way or another so that he can maximize his profit. When he fails in this attempt he will eventually be forced out of business.
When his profits are high, he invites competition and more alternatives are available to the consumer.
Let’s go back to the oil companies. Many people have few or no alternatives to buying gasoline for their transportation needs. Yes, they could opt for mass transit, especially for those long cross country trips where alternatives such as buses, trains or airplanes exist, but for ‘getting to work’ from suburbia, gasoline is essential.
This is a great opportunity for oil companies. Essentially no competition (except among themselves) and virtually no alternatives for their customers.
Should the government step in with ‘price controls’ or ‘taxes on excess profits’?
What happens if they ‘tax excess profits’? First of all who determines what are ‘excess profits’? Does anyone other than the companies themselves know what they need for profits to stay in business? What ‘risks’ must they cover with those profits?
No one can know what profit is required and any additional taxes must simply be added to the price of their products. The end result is that the consumer will pay for any additional taxes (along with any existing taxes or cost of regulations).
If taxing ‘excess profits’ isn’t the answer, what about ‘price controls’?
Once again we have the quandary of needing to know what ‘price’ is ‘correct’. What price will allow the company to stay in business and still be ‘fair’ to the consumer? Once again this is an impossible task for an ‘outsider’. We simply don’t know the ‘cost’ for oil companies and it is undoubtedly different for each company.
Any price control will probably allow some companies to stay in business while others are forced to seize operations. The inevitable consequence will be a reduction in supply and eventual shortages. This is not an effective solution to our need for fuel.
How would the ‘free market’ resolve the issue of transportation costs?
Simply and elegantly!
When oil company profits become high enough, entrepreneurs will see an opportunity and develop alternatives. Some of these alternatives will be attractive to consumers and oil usage will decline and maybe be totally replaced by one or more of these alternatives.
Even in our corrupted market where taxes and regulations distort the effects of a ‘free market’ we’ve seen some alternatives.
Compact and sub-compact vehicles have been developed to reduce gasoline requirements even though taxers and regulations have made these less attractive than they might have been.
Hybrid and electric alternatives are appearing and improving, although the government has imposed so many regulations and ‘incentives’ that the ‘free market’ is totally corrupted and we don’t really know which if any are truly improvements.
The oil and auto industries are intertwined and cooperative. Government has intruded with taxes, regulations and ‘tax loopholes’ to the point that the consumer is no longer in control. The ‘free market’ is totally corrupted. No one knows what ‘might have been’ if the ‘free market’ had been allowed to function.
Compare the oil and auto industry with the communications industry where there has been much less government involvement.
Who, just 20 years ago, would have imagined the evolution in communications? And, at least in my experience, the cost has stayed relatively constant or come down. This is an example of the power of the consumer in a ‘free market‘.