Pump It Up. Don't worry about price gouging now. Worry later.

Slate ^ | Posted Wednesday, Sept. 7, 2005, at 10:18 AM PT | By Austan Goolsbee

[.cnI redruM]

Just before Hurricane Katrina hit the Gulf Coast, the president told the country he would punish lawbreakers and singled out a trio of evildoers: looters, charity scammers, and price gougers. Maybe because they didn't do enough to stop the first two, state and federal governments have aggressively pursued the gougers. In doing so, they have embraced a radically expansive and unreasonable view of what gouging entails—when what they should focus on is what happens next, when prices ought to come down.

When Katrina hit, prices for gasoline rose dramatically throughout the country, in some places by more than a dollar a gallon in 48 hours. Scores of state attorneys general and governors launched investigations. The federal government's gouging-complaint line received 5,000 calls on the first day after the storm. States tend to make their anti-gouging laws purposely vague, forbidding "unconscionable profiteering" during a state of emergency or the like. But rising prices don't equal price gouging. Any reasonable definition of gouging must distinguish it from price increases that would exist in a competitive market.

[.cnI redruM]

One of the smarter and more logical articles about gouging. What Goolsbee left out is the role of price elasticity of demand in setting prices. If you are able not to use a product or employ a substitute (eg. Car pools, The Metro) for the good, the price gouger gets an outrageous price X zero orders in profit. That fixes the problem in a giffee.

During Labor Day, the US demand for gas fell by 4% from the previous week. That's never happened before in recent US history. That's American consumers finally voting with their wallets. Expect a more positive set of gas prices by next Weds. The consumer is finally exercising his/her vote on gas prices.

[The Great RJ]

A great article. However, in the economic short run, gasoline has historically been relatively inelastic based on Lerner Index. This Labor Day's unprecedented drop in demand may signal the change in this trend.

Let the old professor explain: Elasticity is a measure of the sensitivity of demand to changes in price. The demand for goods that are elastic changes significantly with price e.g. agricultural commodities, while inelastic goods e.g. household table salt see little change in demand with changing prices. The Lerner Index is essentialy a measure of elasticity.

No quiz on this week's lesson.

[.cnI redruM]

Yes, The Lerner Index probably wouldn't indicate much elasticity. Gasoline used to be cheap be historical standards. At least until about 1 1/2 years ago.

I wonder if they finally pushed the price high enough to make substitute goods more affordable. That would put a cap on the price our oligopolistic oil industry could charge for gasoline.

Follow the sales of wood stoves and kerosene heaters this winter. If they go thought he roof, you can probably guess that a similar introduction of economic substitution is under way in that market as well.

[Archangelsk]

I just completed a roundtrip test ride on my 18-speed bike to my place of work and back (66 miles). I'll be making that trip two times per week and saving 2/5 of a tank each week.

You bet your arse I'm voting with my wallet and my stamina.