Skip to comments.In Defense of Price Gouging
Posted on 09/01/2005 4:22:37 AM PDT by chronic_loser
Understanding economics has never been a requirement to be a politician. With gas prices reaching $70 per barrel on Monday and hotels outside of the disaster area raising rates, "price-gouging" seems to be politicians' favorite phrase these days. In the coming weeks, as people living in the disaster area try to get everything from fallen trees removed to food, the outcry against higher prices will only get worse. Yet, if political threats of price controls and price-gouging lawsuits prevent prices from rising now, it is the consumers who will suffer in the long run.
In Illinois on Monday, Democratic Gov. Rod Blagojevich started pressing to prosecute gas companies that profit from the recent price hikes brought on by the hurricane, and he is concerned that some of these increases occurred even before the hurricane hit the oil fields in the Gulf. In Hawaii on Sept. 1, the state government is supposed to begin imposing price controls on wholesale gasoline. Michigan, Oregon, California, New York and Connecticut have also debated regulating gas prices.
Even the Bush administration has gotten in on the act by having the Justice Department and the Federal Trade Commission look for evidence of price-gouging and believes retail and wholesale gasoline prices are "too high." Congress is planning on holding hearings on oil company "price-gouging."
In Texas, Attorney General Greg Abbott is threatening legal action against what he called "unconscionable pricing" by hotels that took advantage of desperate people fleeing the chaos in nearby Louisiana. In Alabama, Attorney General Troy King promises to vigorously prosecute businesses that significantly increase prices during the state of emergency.
You would think that people had learned their lessons about price controls during the 1970s, though memories have surely faded. Price controls didn't stop the cost of gasoline from rising. They just changed how we paid for them. Instead of prices rising until the amount people wanted equaled the amount available, chronic shortages of gasoline had Americans waiting in lines for hours. Yet, the supposedly permanent shortages disappeared instantly as soon as price controls were removed.
The free advice being offered by politicians is that it was improper for prices to start rising before Hurricane Katrina disrupted production in the Gulf of Mexico. But waiting to raise prices means that consumers will end up paying even higher prices when the reduced oil flow out of the Gulf is finally felt.
Higher prices today reduce consumption and increase inventories and thus reduce how much prices will rise tomorrow. The overall increase in price will actually be less.
The possibility of higher prices when disasters strike also gives oil companies an incentive to put aside more gas to cover those emergencies. Storing gas is costly, and if you want them to bear those costs, you had better compensate them. The irony is that letting the companies charge higher prices actually reduces customers total costs when you include such things as having to wait in long lines because there will be more gas available when the disaster strikes.
The American oil industry is no more concentrated when prices started rising immediately before Hurricane Katrina hit than it was two weeks earlier, and oil companies possess no sudden increase in monopoly power. Neither have they suddenly become greedier.
Stamping out "price-gouging" by hotels merely means that more of those fleeing the storm will be homeless. No one wants people to pay more for a hotel, but we all also want people to have some place to stay. As the price of hotel rooms rises, some may decide that they will share a room with others. Instead of a family getting one room for the kids and another for the parents, some will make do with having everyone in the same room. At high enough prices, friends or neighbors who can stay with each other will do so.
There is another downside to price regulations. Companies in states all across the country, hoping to make a few dollars, are thinking of loading up their trucks with food, water and generators and heading down to Louisiana, Mississippi and Alabama. The higher the prices, the faster these "greedy" companies and individuals will get their products down to desperate customers. But their greed means less suffering. The more products delivered, the less prices will rise. Political grandstanding today means future disasters will turn out even worse.
What about the poor?
Making the companies pay for others' altruism not only creates the wrong incentives, it is also unfair. If we need to help out, make everyone pay.
Bashing companies may be profitable short-term political behavior, but the discomfort will be over far sooner and less severe if markets are left to their own devices.
1) The Usual crowd of freepers who cannot be bothered to actually read the article but feel compelled to display what they "think" about the rapacious mercantilists, blah blah blah
2) The other set of freepers who may actually read the article but are so overcome with resentment against the exploiters and profiteers, or lugubrious sentiment for the exploited that any appeal to common sense is lost on them.
3) A few hardy souls who actually have some understanding of markets, how they work, and how market based solutions are the best, even in a time of crisis.
This is mostly for crowd number three.
And who don't give a d*mn that God forbade usury.
I'm for #3. Now is not the time to panic. Give the markets time to settle down.
Some (like raising the price of gas) is just survival. If a gas station knows their next delivery of fuel is going to be $3.39 a gallon, then they are going to need that much cash flow to get it, even though the fuel already in the tanks only cost $2.34.
I have no problem with # 3
Anybody who doesn't know that doesn't have an opinion worth listening to.
The alternative to forbidding price gouging would be to publicize every company that does it.
You bring up a few good points, but maybe what is needed is a natural disaster plan that includes agreeable per person rates at the hotels. The participating companies can annually sit down and set the rates by negotiating with the towns and cities in which they operate.
Assuming that orders are always of fixed size. Less of an expensive item at the same percentage profit margin over cost, is needed to equal the profit from a cheap item at the same margin.
"Anybody who doesn't know that doesn't have an opinion worth listening to."
That would include many freepers.
I tried to educate one on replacement costs yesterday, and he made the argument of 'would you fine with me giving you an estimate for fixing your house then charging you 3 times as much'... Like that made any sense or related to the retailing of a commodity like gasonline in ANY way, shape, or form.
For about 4 days following 9-11-01, gas prices locally (about 2000 miles away from NYC and WDC) jumped to over $7 per gallon. No reason. No justification. Nothing but kneejerk price gouging.
By the next week, gas prices returned to normal (9-10 prices).
Price gouging is no different than the looting. Just because it is a business, it doesn't have the right to literally steal from customers. [I am lenient with those along the gulf who are stranded and are 'looting' food and clothing. Many of them lost everything except the clothes on their backs and may be stranded for days. But those looting TVs, computers, etc., -- dang, I could have used a new pc --- just bought a new one -- lol -- are just thieves.]
It is the merchant's responsibility to buy intelligently.
These principles apply wither prices are rising or falling.
When governments impose price controls, retail merchants cannot restock and shortages result.
Nice preemptive strike. LOL.
Anyone who disagrees with the article probably has not read it, is too full of resentment to appreciate it, or has no understanding how markets really work.
Ignore the politics and see what you end up with. It'll be an entirely different system than the one you cherish. John Lott et al ought to reflect upon that.
However, you cannot ignore what Georgia did.
They floated the rumor that they might run out of gasoline.
The resulting panic caused gas lines, panic topping off of the tanks, and the gas station owners raising the prices by the quarter hour. Some raising the price as much as a dollar at a time.
The Florida law about gouging explicitly creates an out for the cost of acquisition of the items being sold. Nobody's ever expected to sell for less than what they had expended to acquire and get the item there. Your son included. I'm amazed you know nothing about that.
I have to admit, though. I got up at 5 am and filled up our three cars. It hurt me to see the contractor with the dually next to me as I watched his pump still rolling at $135.00 as I drove away. It is going to be tough over the next few weeks, and the pretty airheads on TV won't help much. God, but those people are stupid!!
No, you can sell less at a higher price.
Disaster areas have unstable demolished markets, and so there are a lot of situations where sale prices vary within a huge range. It's common to have one person buy a flashlight at ten times the price that someone else paid a few minutes earlier. The role of government is to first meet all life and death emergencies with aid free of charge, and second to provide communications so all the sellers and buyers can find each other so prices can stabilize.
That may be what our gov't has morphed into, but actually Thomas Jefferson vetoed such a bill on the grounds that it was unlawful (unconstitutional). I can google it for you if you ask. The second role of gov't is PRECISELY what the interstate commerce clause is all about, and I agree wholeheartedly.
But those who do have committed the sin of blaspheming the god Economius.
It's the loss of cash flow that puts you out of business.
Any street vendor in Mumbai or Calcutta can tell you that one!
The other big problem is not being able to obtain stock. There are two reasons for that ~ 1) short supply, or, 2) no supply. In the Great Depression, as it began, folks were unable to differentiate between "short" and "no". Once they figured it out all they could do was "dump stock" at less than the price of current acquisition and hope to escape with something. The result of this practice on a wide scale throughout the economy was deflation. This, in turn, did not increase the availability of goods. Which, of course, takes us back to cash flow as a problem.
The rule is, it doesn't matter how low the prices are if you have no cash flow!
That Jefferson thing was not a question of the duties of government but rather the duties of the federal government versus the states, or other entities.
2) a feeling of smug satisfaction among halfwits who have no understanding of how markets work but only know that they resent the "big guys" taking advantage.
Evidently,2) above is sufficient moral justification to allow 1) above to exist....., at least in the minds of some posturing politicians and the airheads who listen to them.
It's always forgotten.
In other words, you agree that there are more answers to the conundrum, than gouging when predicted replacement costs go up. You assumed fixed volume of unit sales in your formula didn't you??? Admit it.
You have a very tunnelvisioned understanding of real world when you claim that.
I have no problems with state governments offering aid, morally or constitutionally.
Thank you for the correction.
Jefferson was so well regarded by the framers that his friend Madison wouldn't tell him he was Publius.
Madison kept the truth from Jefferson until the newspaper articles were sent to the press for publication in book form.
But there is another side to that coin. When everything settles down one would hope that people would have memories and by that I mean they should vote with their walletts by remembering those charging usury prices and those simply charging what the market will bear. There is a difference.
100% of what I said is based on my Great Grandmother's experience in going bankrupt in 1931.
Sorry, have to disagree. It is still there. It's headquarters are still in Rome, just goes by a different name.
Otherwise, there'd be no Mitsubishi, Krupp, Bayer, etc.
One thing that all the "It's not really gouging", folks seem to be missing here is that gas is not a Luxury, it's a necessity. If it were T-Shirts or some other item that people did not need in order to survive, I would have to agree with the market will take care of itself statement.
No, no, it's headquarters are in Athens ~ (as confusing as that might be).
"I just checked a map .
Can,t find any Roman Empire ?
So if only they would have sold gas at the price YOU wanted to pay, things would have turned out better?
Those people fit into category #2.
But would they have been greater had not many people had memories?
First, let's be clear that there's a big difference between "scripture" and "law". The first US constitution was a disaster. Sure, it got us through the first crisis but it had to be scrapped in it's entirety as soon as possible. The second one was better, but it had no safeguards for freedom and even allowed for slavery -including Tommy Jefferson's. It did have one really great part--- Article V for fixing these gaffes.
Second, that's all just the for federal government. State, county, and municipal governments are a very different, and IMHO should have a role in providing say, fire departments that don't ask you what credit cards you have while you kids are dying.
Supply and demand solves the problem by itself.
When there is a limited supply, not everyone gets what they want. Price caps don't change that.
Items are simply worth what someone is willing to pay for them.
It's wonderful that charities choose to make things available at lower or no cost during a crisis.
It's also appropriate for our government to help provide essential items during a crisis.
However, it's not the place of the government to force private individuals to be charitible, nor is it fair.
Those who plan well should be rewarded for their efforts, and those who plan poorly shouldn't be rewarded equally with those who planned better.
Free market? Supply and demand? If left alone these mechanisms will correct them selves and be stronger and better than before. Thats just me, I could be wrong. (sarc)
By the way, Demo-rat Gov. Granholm in Michigan has declared an energy emergency. Detroit gets another handout. (puken and convulsions) Perhaps well see Detroit residents brandishing assault weapons if they dont get their way. My apologies, they already do that.
"Ignore the politics and see what you end up with. "
Well merchants will respond rationally - if politics demand that they sell at a loss, then they won't sell, and shortages will result.
Politicians can either leave it alone, or create shortages. That's it. Most of them will opt for the former, while pretending to take action to magically reduce prices and increase availability.
You are spot on here. That is why the "big" retailers..., the ones who COULD really screw the public, are the first in line to provide relief and charity in situations like this. They aren't stupid, and they know that the public has a long memory and longer resentment. "Gouging" is usually done by "one stop Johnny" crowds. They won't be in business tomorrow doing this, but are simply seeking a short term profit. Even that crowd are not "CROOKS" but simply people who may, say, buy a truckload of generators at retail and seek to sell them at a profit because of the unusual demand. Hell, if Home Depot could supply them, do you not think they WOULD? These guys can't compete with Lowes over the long term, but there is a market niche. They fill it AND THUS REDUCE DEMAND BY FILLING THE MOST CRITICAL DEMAND (i.e., the highest prices bid). In the long run, these people actually REDUCE the price by easing the overall demand.
Will there be ruthless exploitation in that kind of situation? HELL yes. No one is arguing for the moral integrity of the people who supply the most desperate supply fringes of the market, any more than you argue for the moral integrity of finance companies that provide credit at 30% interest. The fact is, though, that these people are simply supplying a segment of the market, and allowing them to function is BETTER THAN TRYING TO REGULATE THE MARKET FROM OUTSIDE (i.e., gov't controls). The the market police itself on price and supply of legal goods, and let God police the motivations of those who sell. It is, contrary to those who wring their hands over the "exploiters," the most compassionate system in the long run.
He sounds like Neal Boortz
This from NealzNuze for today.
GAS PANIC IN ATLANTA --HIGHER PRICES WOULD HAVE SOLVED IT.
When you hear the words "price gouging" uttered by somebody .. even if that somebody is the governor of a state .. you know that you are listening to someone who (a) has a limited understanding of the basics of free-market economics; or, (b) is a politician more interested in pandering to ignorance than in leading.
That describes Atlanta yesterday.
Yesterday afternoon I drove to the WSB studios to participate in a joint AM 750 WSB / Channel 2 fund raising venture. On the way I saw that cars were lined up on the streets waiting to get into gas stations. The panic was on. Word had spread throughout the metro area that there was going to be a fuel shortage. Everyone, it seems, was filling up everything they had that could hold gasoline.
The panic, of course, created that shortage that previously was only a rumor. Even when there is no shortage of gasoline, there is simply no possible way to keep the underground tanks at every service station full if everyone is going to try to fill up their car at the same time. There simply aren't enough tanker trucks on the road to do the job. When rumors create a panic and creates a demand that the marketplace can't meet, it's time for the mechanisms of the free market to take control.
There has never in the history of the world been a better way to allocate scarce resources than to simply allow the law of supply and demand to take its course. Whenever government steps in to interfere, shortages occur and chaos often reigns.
The way to handle the gas panic in Atlanta yesterday was to RAISE PRICES! It's not price gouging. It's the law of supply and demand at work. Today there will be people in Atlanta who might not be able to drive their own cars to work, to doctors appointments or to buy groceries who would otherwise be driving if gas stations throughout Atlanta had raised their prices in response to the increased demand and limited supply.
Let me explain:
As the panic spread, and the demand increased, the prices at the pumps were pretty much unchanged ... for a while. As a result people decided to top off every vehicle they owned .. .no matter how much gas remained in the tank. The predictable result was that stations soon ran out of fuel. The word spread, and more people hit the streets to fill more cars. Today people in Atlanta will find that many gas stations still have their pumps shut down. Throughout the night tanker trucks were busy trying to replenish the stations, but there simply aren't enough trucks to meet this demand. Another supply problem.
So .. what was the solution? For the politician the solution may have been to pander to the electorate by talking about imposing fines on gas station operators who "overcharge", whatever that means, consumers. The real solution, though, was to increase prices in response to the increased demand and limited supply. This is what the uninformed and the political class call "price gouging."
Let's take a look at what would have happened if the free market had been allowed to do what it has always done so well -- when left alone -- and that is to allocate scarce resources. If gas prices had risen strongly yesterday (as they in fact did at some stations) then people would have given a second thought to filling every car they own. If the prices were, say, $5 a gallon, consumers would have purchased what they thought they might need to get through the next few days, and would have started making plans for conservation., Certainly few people would have been shuttling back and forth filling up every car they owned. As a result, the gas that one consumer didn't pump into his second or third car because the price was so high would have been gas available for someone to put into the car they actually needed to get to work.
Keeping the prices artificially low encouraged over-consumption and hoarding.
The truth is that when Georgia's Governor Sonny Perdue signed an executive order late yesterday afternoon threatening heavy fines on gasoline retailers who, as he said "overcharge" customers, he became a part of the problem and not a part of the solution. His statements were a signal to the people that there was a crisis in gasoline supplies, and to get out there and fill up everything they could while he held the prices down. Today Atlanta drivers will experience the results of the governor's actions.
This whole price gouging nonsense was also front and center last year when four hurricanes ripped through Florida. Entrepreneurs abandoned plans to rush needed supplies and commodities to South Florida when politicians started pandering to voters with dire threats of fines and even jail time for evil price gougers. The marketplace simply wasn't allowed to respond properly to increased demand .. and shortages resulted.
Here's an example I used yesterday. Hotel and motel rooms. In the aftermath of the hurricane -- especially Hurricane Charley -- there was a huge demand for rooms for displaced hurricane victims. So, here come the politicians with their laws restricting what motel owners could charge for rooms. The result was that fewer families could find a place to stay. Here's why: A family of four arrives seeks shelter at a hotel where rooms rates are being held down by anti-price gouging laws. They decide to get two rooms when one would do. One room for mom and dad, the adjoining room for the children. Along comes the second family of four, only to find that there are no more rooms. Sorry, out of luck. Now, if prices had been allowed to rise with the demand that first family might have decided to make do with one room instead of two. That would have left a room available for the next family to arrive.
This is a problem borne of economic ignorance. Our hideous government schools do a pathetic job of teaching the very basics of free market economics. The ignorance of the public is then exploited by politicians for votes and support.
And thus it will ever be.
I was actually going to call the "Savage Nation" last night because this topic was under discussion. Dr. Savage was calling for immediate energy price caps because of what he stated was a supply side monopoly. Had I called, this is what I would have said:
Although the Supply Side may be monopolistic, you neglected to address the demand side. Give the FREE MARKET TIME to WORK!
Consumers have the option of:
1] Driving less.
3] Using public transportation.
4] Getting a smaller more fuel efficient car.
5] Increasing home energy efficiency by adding insulation, installing thermopane windows, etc.
6] Turning down the home thermostat somewhat and dress more warmly.
7] Install alternative energy systems in the home.
8] Some combination of the above.
Less consumption would ultimately force prices downward to more reasonable levels. This is how the free market works and has always proved to be a superior method of cost containment than artificially imposed price caps.
Yes, the "free" market. This same market that these companies paid lobbyists on Capitol Hill to shut out all competetors. Go to hell you bum.
Post 45. thanks for the reply