Gasoline prices have hit new highs. Hurricane Katrina, a lack of refineries (the newest U.S. refinery is thirty years old), a “Balkanzied” fuel market, and high demand drive prices. Politicians are tempted to “protect” consumers from being “gouged” by oil companies.

Unfortunately, one of their favored policies, a cap on gasoline prices, has a sorry history. Just as minimum wage laws result in perverse consequences (i.e., they raise unemployment among the low-skilled workers they’re meant to help), price caps on gas will hurt consumers and the environment. Here’s the logic.

Prices convey information about relative scarcity. They also provide strong incentives to act as though one cares about unknown others. Rising gas prices tell consumers that gasoline has grown scarce. This is all consumers must know to conserve gas. And they do. For example, drivers reduce unnecessary trips, carpool, or ride public transportation; those buying a new car will consider a more fuel-efficient model. In sum, high gas prices induce consumers to act in socially responsible ways -- without any prodding or coercion.

Carmakers also change. If they don’t, they suffer. Hence, they’re producing attractive, dependable cars that go ever farther on a gallon of gas. Sales of hybrid cars are soaring. By year’s end over 200,000 hybrids will have rolled off dealer lots. Consumers have more than a dozen models to choose from. In 1998, the number of hybrids available was zero. (The average price of gas that year was around $1.00 a gallon.)

Price controls are a form of censorship. They conceal and distort information. By keeping the price of gas artificially low, instead of reducing their demand, consumers maintain consumption patterns. Price controls not only discourage conservation, they inhibit technological innovation and investment in alternative energy sources.

They also impede our efforts to reduce dependence on oil, especially from the Middle East. For example, the 300-billion-barrel reserve in the Athabasca oil sands of Alberta will only be fully developed if energy investors are confident that oil prices will remain high. (They recall that as recently as 1999 oil was $9 a barrel.)

Across time and cultures laws that artificially lower prices, whether for medical care or housing, result in consumers demanding more goods than will be supplied. The resulting shortages are entirely predictable.

Here’s another example of the pernicious effect of price controls. It’s especially relevant as residents of the Gulf Coast try to rebuild in the wake of Katrina.

There is always huge demand for plywood after a natural disaster. And we can understand the desire to cap the price of plywood after a hurricane. On the surface, bruised and battered consumers are being “protected” from opportunistic price gougers.

But then what? If price caps are imposed, lumber yards and mills don’t have the incentive (as reflected by higher prices) to redirect their plywood shipments toward devastated places. Thus, loads of plywood end up in Newark for a new bowling alley rather than New Orleans for boarding up broken windows and replacing missing roofs.

Price signals encourage people to act as through they care about others. Rising plywood prices are signals from New Orleans residents telling the rest of us, “Postpone your plans to build a new addition. We need the plywood more than you.” Artificially restricting prices in Louisiana, where the product is suddenly in high demand, creates painful shortages. Hurricane survivors are harmed by well-intended efforts to help them. This same logic applies to gasoline.

Here’s a final word from Princeton economics professor Alan Blinder, former advisor to Al Gore and John Kerry. In his book, Economics: Principles and Policy, he writes: “An attempt by government regulations to force prices above or below their equilibrium levels is likely to lead to shortages or surpluses, to black markets in which goods are sold at illegal prices.... The market always strikes back at attempts to repeal the law of supply and demand.... Though the market is surely not flawless, and government interferences often have praiseworthy goals, good intentions are not enough. Any government that sets out to repair what it sees as a defect in the market mechanism runs the risk of causing even more serious damage elsewhere.”