In Defense of Price Gouging

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.

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.

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.

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.

"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"

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.

2] Carpooling.

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.

But there is another side to that coin. When everything settles down one would hope that people would have memories...remembering those charging usury prices and those simply charging what the market will bear.

There will be repercussions in the local markets, particularly in the rural areas.

One local station that usually services 20-30 vehicles per day, on a good day, raised his prices three times during the day, based upon watching the news.

He went from $2.43 per gallon to $2.89, and will probably go to over $3.00 today, which would probably not have been noticed as much in a high-volume station, but everyone LOCAL knows that he raised the price on what was in the ground.

His is a convenience store in the truest sense of the word, as most persons that fuel up there do so only because the nearest station with better prices is located down off the mountain, at least 14 miles away, either direction.

I suspect he lost a few "convenience" customers as a result of that particularly evident gouge.

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