Three Cheers For "Price Gougers"

With every disaster or crisis, it seems that the public, press and politicians require a remedial course in Economics 101. In fact, apparently we need an ongoing educational campaign even when there is no catastrophe, as demonstrated by the recent foolish legislation in the state of Hawaii to cap wholesale fuel prices. Note the subhead in the linked story: "Some analysts warn move may spur supply problems."

Really? Only "some"? Maybe they need to be more careful about which "analysts" they listen to. Whatever would we do without those other "analysts"?

Imagine the headlines, "Legislature Mandates Pi To Equal 3.00000 -- Some Analysts Warn Move May Spur Engineering Problems," or "King Canute Commands Tide To Recede -- Some Analysts Warn Move May Spur Wet Footwear Problems." What would we think of the analysts who thought that the proposed mandates were no problem, perfectly in consonance with the laws of physics and human nature? Even most people with typical journalism educations would recognize such heads and subheads as the jokes they are, but somehow when it comes to basic economics, the laws of supply and demand, and the function of prices in a market economy bizarrely remain subjects for public debate.

I write this little essay sadly, knowing that it's been written many times before, and that it will have to be written many times again, if history is any judge. It's hard enough to watch all of the suffering of these apocalyptic events on the Gulf Coast without having to contemplate as well the compounding of the problems that will be achieved in future days by editorial writers and public officials with their calls for defiance of economic reality. I grind my teeth in frustration at all of the economic damage that will continue to be wrought by well-meaning but economically ignorant people as they attempt to circumvent the most efficient means of delivering products and services to those areas in which they are needed most -- the market, with its pricing mechanisms.

Let's recap, briefly, for those who never took the class, or have forgotten it. It's really simple. In any locality, when the supply of a particular item is reduced with no change in demand, or the demand for it increased with no change in supply, or supply is decreased with a demand increase, prices will go up.

This is a signal to the market. To those demanding the product, it is a signal that the supply is relatively short, and that they should perhaps rethink the level of their demand, if possible. To the suppliers, it is a signal that more of the resources must be brought to market. In both cases, it will result in a change in behavior on both parties that will restore the balance between supply and demand. Moreover, it does so in a useful, quantitative way. It tells the supplier how much expense, risk and effort she should expend to increase the supply. This calculation may even bring new suppliers into the market. It also indicates the degree to which it is sensible for the consumer to change their demand. When by fiat we pretend that the price has not gone up, it's like covering up the signposts, and we shouldn't be surprised when those supplying no longer attempt to increase the supply, and those demanding can't be bothered to reduce their usage of that particular commodity.

Let us ignore for the moment the horrific situation in the worst-hit areas, in which first-worlders have been thrust into the third world literally overnight, many with no place to even sleep, let alone have access to food, water and other necessities or money with which to purchase them. In some of the other areas, homes are damaged, but intact and dry, and people have cash. Commodities like gasoline, perishable food and ice are in short supply. In fact, gasoline prices are rising across the nation, in response to the sudden reduction in refinery capacity on the Gulf Coast.

Consider -- if a gas station owner has gas, someone has to decide who gets it. If the price remains at pre-hurricane levels, many will fill their tanks, because they can afford to do so, against the chance (and even likelihood) that gas will later become completely unavailable (a self-fulfilling prophecy if the price is not allowed to rise). Many will do so even if they have no immediate need for it. But after the first few people do this, the gas will be gone, and none will be available for those who come after, because it's now tied up in the gas tanks of those who didn't really need it. Those who didn't get any may include emergency workers, or truck drivers who need it to go out and find other goods to bring in. It is likely worth more to them, but they didn't get it, because the price was artificially fixed. Moreover, had the price been allowed to rise, they would have been able to afford it, because they would have been able to demand more resources with which to pay for it -- the emergency worker might have had aid from local agencies to pay for it, or the truck driver might have been willing to make the investment in order to recover it by bringing in necessary goods (assuming, of course, that prices on those weren't capped).

Similarly, if ice prices rise to the market, the man who needs to keep his insulin cold for his diabetes treatment will place a higher value on it than the man who wants to keep his beer cold, and will have a better chance of getting it. The man who might rent two hotel rooms for his family for additional comfort might, in the face of appropriately higher prices, inconvenience himself and only get one, releasing one for another whole family.

This works for the supply side as well. Making and transporting ice costs money. When the local ice plant is out of commission, it has to be brought in from other locations, in refrigerated trucks, at higher gasoline costs. Who would bother to take the trouble, expense and risk to deliver it at a loss when they can only get the same price for it as before the hurricane?

Of course, some argue that prices shouldn't go up for stock on hand because the cost didn't go up. After all, the gas station owner is selling gas that he already paid for at pre-hurricane wholesale prices. Why should he make "obscene profits," taking advantage of a situation by jacking up the price when his price hasn't changed? But in reality his prices have already changed. He will have to replace the gas that he sells, and he knows, either indirectly because he understands the supply situation, or directly because he's gotten a call from his supplier, that the cost of his next tank load will be dramatically higher. In order to pay for it, he has to get as much as possible for the stock he has on hand, which means as much as the market will bear against his competition, if he has any. If he doesn't have any, then he just has to guess.

Sure. Sometimes life isn't fair. We can't eliminate unfairness from life -- at best we can minimize it. But what's more unfair -- someone who supplies a community with needed goods while making a profit (at some financial, and even personal risk, given the breakdown of civil law in many areas, in which shipments can be hijacked), or someone who overpurchases and hoards a commodity because the price doesn't reflect the demand and supply? Ice at three dollars a bag doesn't do one much good if there are no bags available at that price.

The response to this, in turn, is that the solution is rationing. But is it more fair to have a bureaucrat, perhaps unfamiliar with the needs of the local community, making decisions about who should get scarce goods? Does the local commissar understand the market better than the market? We can recognize that when prices are high, some people of modest means may not get essential goods. A better solution for this is not to subsidize prices, which misallocate the resources due to the false market signals, but to subsidize the individuals who need help, by giving them cash or vouchers (somewhat akin to the food stamp program).

Price "gouging" is purely in the mind of the beholder, and there's no way to distinguish between it and the necessary signals that the market must have to ensure the most efficient use of resources. The price "gougers" are (often, if not always) the people who will have incentives to satisfy market needs as quickly as possible, and ensure that the economic recovery will occur. That some people may "unfairly" take advantage of this is a price we have to pay, and it's a small one compared to the alternative.

There has been much discussion recently (much of it foolish) of how this disaster was a result of "fooling mother nature," whether in the absurdity of asking whether or not it's a result of not acquiescing to the unjustifiable damage to our economy that would have resulted from the Kyoto Treaty, to the more sensible questions of how much effort we should expend to continue to divert the natural course of the greatest river on our continent. To whatever degree that's true, let us not compound the damage, and slow the recovery from it, by attempting to fool mother economics.

Tell us: 1: Exactly how you would determine someone is "gouging"

Gouging is when the customer needs something that is critical to their health and when the supplier has a monopoly over a short time period. An example would be someone needs a ladder to escape from a burning building and you have the only ladder around. Gouging is if you ask 10,000 dollars to rent the ladder for a few minutes. Here you have a temporary monopoly and the customer needs it to survive.

take a few courses in Economics, its very clear you have no idea what you are talking about.

Every economics book I ever read argues for regulation of monopolies.

Gouging can only occur when a monopoly exists. No one argues that monopolies should be allowed to operate unfettered.

The Standard Oil Trust actually brought the price of kerosene down a considerable amount. Anti-trust legislation was aimed at the Standard Oil Trust, even though after the company became a monopoly, the price of kerosene dropped a tremendous amount. It went from somewhere around 18 cents a gallon to 7 cents a gallon.

So, again, in what way are monopolies bad?

Price gougers my butt, and it isn't even about profits.

These gasstations have bills to pay every week with or without gasoline to sell. If they run out of gas as most expected than they still need to pay the bills, so good planning requires them to guesss how long they would be without gas and to adjust prices accordingly.

This allows them to stay in bussiness when they have no gas to sell.

economics and freedom are closely related. Almost inseperable. If you do not have property rights, including the right to dispose of your property according to your own terms, then you do not have freedom - period. Just as it is important to study the fight for freedom over the centuries, understanding how people have fought against the laws of economics and failed is important, too.

Yet people here want to try the same things over again, preferring to stick their heads in the sand rather than admit the failures of the past.

Telling the world how virtuous you are for opposing price gouging is not an economic plan. It is not compassionate. Price caps don't work,and have disastrous, even deadly effects. When your imaginary paradise meets the real world, your way is revealed to be an utter failure. Every time.

You seriously should consider a visit to a shrink.

So, if you were making Florida's anti-gouging law, you would put into law that a $10,000 ladder is against the law, but a $9999 is ok? What about the $5000 ladder? Or the $500 ladder? Tell me again what is gouging and how would you write the law? Is a ladder generally considered "critical to their health"?

What about the case of generators? Is $1000 a gouge? Or $500? How would you write the law? Is a generator considered "critical to their health".

Can you see how ridiculous some laws can be?

Gouging can only occur when a monopoly exists.

Not true.

Allegations of gouging in Atlanta and Florida are in the news over the last 4 days.

There is no monopoly, and no immediate shortage. Simply a fear of a shortage sufficient to make people pay $6 per gallon for gasoline for hording purposes.

In these situations gouging is the best thing that can happen. It puts a brake on the hording.

We are not talking about the regulation of monopolies in this thread.

"An example would be someone needs a ladder to escape from a burning building and you have the only ladder around. Gouging is if you ask 10,000 dollars to rent the ladder for a few minutes"

Super. Thanks for the most dire example you can think of.

Now, answer a question:

Who owns the ladder?

Now, keep in mind you may want to change the subject to what the ladder owner SHOULD do in this siutation...how he's going to hell if he charges any money, how the goverment should step in and take it, etc. That's the easy way out. Try not to take it. Instead, think about the most basic issue- who owns that ladder?

Your answer will determine what you truly believe in.

Who owns that ladder? The person who planned ahead and bought it, the people who didn't plan ahead but need it, or the government?

If you answer 'the person that bought it', you believe in freedom.
If you answer 'the people who need it but didn't plan ahead', you believe in theft.
If you answer 'the government', you believe in socialism.

Only the true owner of the ladder has the right to determine how something he sacrificed his time and money to buy has the right to determine what he should do with it. So answer who really owns that ladder.

Of course, forcing people to acknowledge this distinction will likely either get me called a nazi, cold hearted, or whatever else the offended party can managed to spew out with the hatred and anger. But it doesn't change what they believe in at their core. The personal attacks and emotional bile that spews forth is just a sign that they only can think with what they feel at the moment. They have no core principles on which they are based - they merely drift along from situation to situation, changing their principles like a weather vane in a windstorm.

"You seriously should consider a visit to a shrink."

Wow, pithy. But again, I predicted it.

You have nothing to back up your arguments. You have no core principles. Only emotion. So your only outlet is yet another personal attack.

Every time governments do what you advocate, people suffer, and some die.

Yet you think you are the compassionate one.

Way to go, Hillary.

Yes, to put in their cars that are underwater.

First, most of the people evacuated a week ago in their cars. The figure usually tossed around is 90%. They still have operable cars and are using them. You are concentrating on the 10% who did not. Secondly, the 10% still are actually demanding gas from the system -- although indirectly. How did they get to Houston? Did they walk or did they ride in a vehicle? How does their food and other necessities constantly arrive at their new location to keep them supplied? Carrier pigeons?

You throw them in jail, just like Jeb Bush has said he will do in Florida if he catches gas stations dramatically overcharging. That should solve the problem

That's pretty scary. Tell me, should he also be thrown in jail if he decides he doesn't want to sell his $6 gas for $3 and decides to close the gas station?

Gouging is when the customer needs something that is critical to their health and when the supplier has a monopoly over a short time period.

I'm sorry, but you don't get to define gouging for us.

"Gouging" (to the extent that it exists at all) can occur without a monopoly and without a real shortage, and without any threat to health or safety.

All it takes is a perceived shortage, or a perceived impending shortage.

Further, in those cases where such a perception triggers panic buying, the natural tendency is for prices to go up, because a properly functioning market derives the highest price the customer is willing to pay, and/or the lowest price at which the supplier is willing to sell. This is a GOOD THING^tm. It regulates demand. It regulates supply.

Gouging is ill defined, but generally is perceived to be any price which results in "excess" profits (what ever that might be). Gouging is largely a pejorative used to describe a market situation unfavorable to the the person making the allegation. There is no universally accepted description of the term in Economics.

Gas stations in Atlanta can charge $6/gal not because there is an actual shortage in Atlanta, but merely because there is a perceived future shortage.

They can do this without any collusion in what clearly is a non-monopoly situation, by simply doing business according to the free market principals.

He's the one who said it best.

This thread is a little like the collapse of the soviet union. Liberals still thought the principles could work, it's just that the 'right people' weren't in charge. The supposed conservative / freedom oriented people here somehow think THEIR price caps (which is what anti-gouging laws are) will somehow work this time. Because they have good intentions, of course.

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