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.
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