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In Defense of Price Gouging
American Enterprise Institute | John Lott

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.


TOPICS: Business/Economy; Crime/Corruption; Culture/Society; Government; News/Current Events
KEYWORDS: aei; gasprices; johnlott; pricegouging; sonyajones
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To: George Smiley

You obviously care more about the profits of oil companies than your fellow americans so no definition would satisfy you. You would have no problems with American comnpanies selling arms to China as long as capitalism is not being hindered.


241 posted on 09/01/2005 7:28:07 AM PDT by amosmoses
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To: HiTech RedNeck
Document any jealousy that I expressed.

I would say (again) that it is not so much "jealousy" as "envy," which is a far more serious moral condition. "Jealousy" is simply wanting what you have. "Envy" realizes that I cannot have what you have, but hates you for having it, and wants to destroy your wealth or your ability to produce wealth. It is usually justified by the argument that those who "have it" did not "get it" in the correct manner, or that the very fact that some do not "have it"eradicates the right of others to do so, and they must be punished. This is the root of leftism and is a moral canker at the soul of those who argue against "the god Economius." Again, the "god" arguing against this is not the God of historical Christianity, but another, who brings the smell of brimstone with the argument. The millions who have died in the name of that "economic justice" in the past century should show the argument for what it is, but there are many who still buy into it. Some do so while citing the bible, it seems.

242 posted on 09/01/2005 7:28:10 AM PDT by chronic_loser
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To: flashbunny

Thanks for making it clear that this Economius of yours cannot tolerate laws against adultery. Hey, the Market is all.


243 posted on 09/01/2005 7:30:00 AM PDT by HiTech RedNeck (No wonder the Southern Baptist Church threw Greer out: Only one god per church! [Ann Coulter])
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To: George Smiley
"How much does it cost to replace a drilling rig that's been destroyed or re-pipe a well that's come-a-loose?

How much does it cost to refit a refinery that's been seriously damaged? "

Here's the free republic situational socialist response:

"They should have insurance for that! They don't have to pay anything!"
244 posted on 09/01/2005 7:30:22 AM PDT by flashbunny (Defending the free market on FREE republic is like having to defend the flag at a VFW convention.)
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To: chronic_loser

Document any envy that I expressed.


245 posted on 09/01/2005 7:30:43 AM PDT by HiTech RedNeck (No wonder the Southern Baptist Church threw Greer out: Only one god per church! [Ann Coulter])
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To: Smokin' Joe
Involve Government in the oil industry at an intimate level and what you will get is FUBAR.

William E. Simon wrote about how he kept a box of "Whip Inflation Now" buttons around to bring him back to reality every time he even briefly considered advocating any sort of government intervention in things economic.

246 posted on 09/01/2005 7:31:57 AM PDT by George Smiley (This tagline deliberately targeted journalists.)
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To: chronic_loser
The millions who have died in the name of that "economic justice" in the past century should show the argument for what it is, but there are many who still buy into it.

Anything can be pushed to untenable extremes. How quickly you descend into your insinuation that what I say is of Satan, after inveighing against me doing same.

247 posted on 09/01/2005 7:33:32 AM PDT by HiTech RedNeck (No wonder the Southern Baptist Church threw Greer out: Only one god per church! [Ann Coulter])
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To: KC_Conspirator
Now let me ask you, could someone also write an article titled "In the Defense of Pimping"?

It's been done. To summarize Block's argument, if a pimp uses force or violence, he should be imprisoned for violating his employees' civil rights. But assuming the business relationship is purely voluntary, and also assuming that prostitution is legal, the pimp provides advertising, physical security, employment benefits, etc., which makes it easier than free-lance prostitution.

Lest I be misrepresented as defending pimping myself, I should point out that I approve of illegalizing prostitution. I can't, at this time, make a solid "libertarian" argument for my position, because it's a purely moral position. I regard prostitution as the evil thing the Bible calls it, and I believe it should be illegal. Hence, pimping would also be illegal. The true libertarian would legalize it along with all other "victimless crimes".

248 posted on 09/01/2005 7:33:37 AM PDT by Shalom Israel (Pray for the peace of Jerusalem.)
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To: HiTech RedNeck
Document any envy that I expressed.

You hate the suppliers of a commodity at prices that are above what you call "fair," and think that they should be stopped by government regulations. Do you deny this? That is almost a textbook definition of envy.

249 posted on 09/01/2005 7:34:12 AM PDT by chronic_loser
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To: amosmoses
Looting and price gouging= taking advantage of a bad situation.

And not reacting to changes in economic reality could allow some people to take advantage of a bad situation at the expense of everyone else.

For example, as a result of the disaster there is no drinking water and now everybody needs to get bottled water. This drastically increases the demand for my stock of Ozarka at the local convenience store and the increase in demand creates a new equilibrium market price of $15.00 per liter bottle (yesterday the market price was $1.50 per bottle). Either because I don't want to "price gouge" or because the government passed a law against price gouging, I decide to keep my price at yesterday's market price of $1.50. Also, I am reluctant to limit sales because individuals should have the freedom to buy however much they need, so Joe Hoarder comes in with his pickup truck and buys my entire stock at $1.50 per bottle so I have no more water to sell to anyone else. In the meantime, Joe "shares" his newly acquired stock of water with his friends and family if they are willing to pay a "discounted" price of $10.00 per bottle. So Joe was able to take advantage of a bad situation, but the rest of the community is worse off because I did not adjust my price to reflect the new economic reality.

250 posted on 09/01/2005 7:34:15 AM PDT by VRWCmember
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To: amosmoses
I asked you to define price gouging and you respond by flaming me?

What disparaging statements did I make about YOU?

We're discussing oil production and gasoline markets in an economic context, and whether government intervention, i.e., price controls would be a positive or a negative.

***Most*** folks here are even discussing it rationally.

Feel free to contribute if you wish.

Or not.

251 posted on 09/01/2005 7:35:51 AM PDT by George Smiley (This tagline deliberately targeted journalists.)
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To: HiTech RedNeck

Hey, keep putting words in my mouth.

It's you being "christian" again.

Way to go.

As long as you quote your bible, cite God as your justification, and put yourself off as a "Christian", I guess you actual behavior doesn't matter, right?

Just like a liberal, you have good intetions. What consequences are you actions anyway?

"If any man among you seem to be religious, and bridleth not his tongue, but deceiveth his own heart, this man's religion is vain"

James 1:26

Just providing YOU with a bible quote.


252 posted on 09/01/2005 7:36:33 AM PDT by flashbunny (Defending the free market on FREE republic is like having to defend the flag at a VFW convention.)
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To: chronic_loser
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.

In theory this is true but in reality it's more complex. There are factors that effect supply and demand such as the about of competition, the amount of "choice" involved in the purchase, degree of government involvement which might artificially restrain output/supply, emotion, etc.

Gas prices will drop from the panic increases as a large percentage of the population will voluntarily reduce consumption which will have a short term effect of lowering prices or slowing the increase as demand drops.

253 posted on 09/01/2005 7:36:51 AM PDT by 1Old Pro
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To: chronic_loser

At some point, there will be an oil glut again, with subsequent regional real estate depressions, etc. If you live long enough, you can actually see the cycle happen a few times.

Just file away this article away for when Texas politicians and special interests, etc., start cry-babying and lobbying again for federal government intervention to bail out their stagnant local economies after they overreach - just like they did in the 1980s after the price-gouging during the 70s.


254 posted on 09/01/2005 7:37:22 AM PDT by soxfan
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To: coconutt2000

don't you see, setting any arbitary rate will set limit on how much products can be delivered.

Simply economics.
at higher prices, more goods are available.
at lower prices, less good are available.

higher prices are even more critical at the time of emergency.

these submits for the emergency planning is good but the emergency by nature are event that can't be well-enough planned. How do you really prepare for Earth Quake, Tornado, ect.? You can take precautions but to say, we can plan such a event would conclude that we can control the event thus control the supply of goods/services well ahead of time. Unlike customers that are looking for water and food, whom are relatively constant, natural disasters aren't.

read Thomas Sowell's Basic Economic.

Very well written book.


255 posted on 09/01/2005 7:37:34 AM PDT by ideablitz (Helping to push frontier of ignorance.)
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To: chronic_loser
Kindly note that the only sanction I have actually advocated here, is that of shame.

Our very President Bush has gone further than I:

"I think there ought to be zero tolerance of people breaking the law during an emergency such as this _ whether it be looting, or price gouging at the gasoline pump, or taking advantage of charitable giving or insurance fraud," Bush said. "And I've made that clear to our attorney general. The citizens ought to be working together."

256 posted on 09/01/2005 7:37:45 AM PDT by HiTech RedNeck (No wonder the Southern Baptist Church threw Greer out: Only one god per church! [Ann Coulter])
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To: HiTech RedNeck
The government's position, and yours, are indefensible. America is being faced with a choice. Socialism is a flawed economic model that fails every time it is tried. Socialism will eventually destroy any economy that adopts it. Capitalism works. The United States's rise to greatness occurred because we adopted freedom and capitalism to a greater extent than any nation in history. Momentum carried us to new heights in spite of our having started abandoning freedom and capitalism in the thirties and continued the trend on a progressive basis. The US is past its peak and now on the downhill slide toward the Ash-heap of history.

Laws that regulate prices under any circumstances are an affront to concepts of freedom. As politicians struggle to stay in power, everything will become an emergency that justifies whatever politicians believe will garner the most votes. Government taxes are the largest single item in every family's budget. Taxes are more costly than food and shelter combined. All democracies end in bankruptcy or hyperinflation. Are we free individuals or government serfs?

257 posted on 09/01/2005 7:38:14 AM PDT by Reaganghost (Democrats are living proof that you can fool some of the people all of the time.)
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To: VRWCmember
So Joe was able to take advantage of a bad situation, but the rest of the community is worse off because I did not adjust my price to reflect the new economic reality.

Well there could have been a limited quantity sales policy too.

258 posted on 09/01/2005 7:39:22 AM PDT by HiTech RedNeck (No wonder the Southern Baptist Church threw Greer out: Only one god per church! [Ann Coulter])
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To: George Smiley
But the ubiquity of Net connection should make the importance of "where" less important than it is for a whole lot of folks. I avoided a 35 mile drive to work today by dialing in.

Luckily, I have the option to work that way as well. But we mustn't forget the overwhelming majority of others don't have that option, which we computer/office-based workers tend to forget sometimes.

259 posted on 09/01/2005 7:41:40 AM PDT by Hemingway's Ghost (Spirit of '75)
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To: flashbunny

Well if you provided the slightest hint that prostitution should not be allowed despite the "law of gravity" market that is the Law of All, I should take back my statement as mistaken.


260 posted on 09/01/2005 7:41:54 AM PDT by HiTech RedNeck (No wonder the Southern Baptist Church threw Greer out: Only one god per church! [Ann Coulter])
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