Posted on 09/02/2005 10:05:18 PM PDT by NonZeroSum
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.
What does this mean in the current situation?
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.
But won't some people make "unfair" profits from such "greed"?
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.
It's Bush's fault.
"Do you include yourself as one who would price gouge? Profit off of people's desperation? Are you one of them?"
I must admit I do complain at the price of beer at the ball game. I do get thirsty, and I am desperate. How desperate? Enough to stand on a soapbox with microphone and DEMAND the beer vendors lower the price...er, uh I mean GIVE it away to all us desperate beer drinkers! I want the government to limit the costs that the vendors charge to what I think is fair.
Ever been to Ebay.com? That wonderfully handmade sweater you put online is wanted by several desperate people, and the price is rising. C'mon it may have cost you fifty dollars to make it, can you imagine someone telling you that you must sell it for no more than a ten dollar profit? or on the other hand, competitors are offering sweaters just like yours at a lower price. Guess what? Your sweater is now worth forty dollars! Welcome to capitalism, sorry your not happy with it.
Prices aren't about fairness. What something cost you yesterday reflected the conditions yesterday. If those conditions change, so does the price - for better or for worse.
What am I hearing? I never get on these forums so I have no Idea what proper ettiquette is, or who this comment is dirrected to. (Cant tell who was talking and who was responding.) But, by the name I chose to use Im sure my stand is obvious. I probably wont respond to any responses since I stumbled on this while doing a search to get information to prepare to send a couple crews west to AL,and MS, to what?? Make me a ton of money roofing!! Price Gouging? Have you ever went to a "going out of Bizz Sale? What? You took advantage of someones misfortune to aquire merchandice at "scumbag" prices, not giving any thought to there misfortune? Will someone please alert the F.B.I., C.I.A., Homeland Sequrity,yada yada that there is a "merchandice gouger" (If merchandice=money, and money=merchandice, therfore let merchandice gouger read and/or = price gouger) among us?!?! Estate sale from a death? Wait till intrest rates sink through the floor and refinance locking your mortage company into a stupidly low rate for the next 20 years knowing that intrest rates will go up and they're going to have to borrow at a higher rate againts the money they lent you? Or heres the best one....lets say you live in Detroit and you want to have your roof done, know what you do if it aint leakin and you can wait? You wait till the middle of January when there's no DEMAND for roofing, but plenty of SUPPLY (read "all construction tradesman with nothin to do and desperate for money)then you call and get bids from a bunch of us companies, and we're already doing jobs AT COST just to give our employees some work so they dont ever figure out that mayby roofing wasnt the best field if yer in the north. Then, you tell me you got a bid from my competitor a lil lower, and GOUGE ME MORE SCUMBAG! But thats all right, I live with it. Supply and demand! Sooooo I see hurricanes whippin thru, get down here the day before Ivan hits in a Budget truck with 23 generators (sorry I missed ya on Andrew)and make a killing! I get my occupational bizz licences for the 2 counties I'm in, even my city licences all for retail sales of generators. And guess what, I have a copy of the Florida price gouging law. It states...."unconsiabl price increases referred to as "price-gouging" on nessity items or goods....." Notice the key word? NECCESITY (wich I cant spell, stupid roofers). Three basic needs: food, water, shelter, and I'll be fair and include medicine (wich if it really were why wouldnt our country have free health care like our frindly Canooks to the north?) Electricity? A neccesity?? Ice??? Gas??? I watch Little House on the Prarie and Survivor! That stuff is not a nessecity! So yer sittin there thinking " gas is a neccesity if you need to evacuate" maybe so but if you cant afford the gas to evacuate walk in there and offer the Gas Man yer weeding ring, or shotgun, or go down the street to the pawn shop, git money for it fill yer tank, and git the hell outta town! And Pawn shops, ever go in there in a pinch in the winter with some jewelery to git a lil cash to float you a week? Talk about price gougin...Mister I payed $800 for that bracelet and you wanna give me $35??? Guess what.... Supply and Demand. Why do you think Home Depot and Lowes ships all there plywood to Florida Right before a hurricane hits?? Help out the community??? Nooo...helping would be givin it away to ederly and less fortunate people...its the DEMAND! They can sell a semi load in 1 hour! Wish I had a lumber yard....HMMMMMM.
I ended up buying a house here In Florida in Gulf Breeze outside of Pensacola and Most of my employees moved here permanent too..and if you watch the weather channel, you see ive been thru a couple storms here as a Resident/Consumer; stayed for all of em... Got awsome vidio of Hurricane Dennis as the eye passed over us and we were out in the yard for 5 minutes in dead calm and sunshine, stayed for Arlene on Pensacola Beach and got drunk and blown over. Cindy was weak here. But Katrina's surge made it to my back yard but not in the house, mostly justy light wind damage. Dennis was worse, got flooding in my house, shed with about $3000 tools flooded and ripped apart, fences all gone, and 6 huge 40 foot and taller trees down. There still out there down in the yard, know why??? Cuz SCUMBAG tree cutters are knockin on my door offer to relieve me of triple the amount of cash it should be to remove em! Shocking! But I'm smart...soon thell be out of work...they'll be hurtin for jobs and considering changing proffesions, and i'm gonna gouge them and get the work done for next to nothin!!! I LOVE SUPPLY AND DEMAND!! But in the meantime Im glad for them that there makin a killin off these people who are so impatient and want it done NOW. I just happen to be enough ghetto-redneck that I don't care if I live in one of the better neighborhoods here, I'm waitin till the DEMAND goes down, so to any of my neighbors reading this...deal with, itll git done when it gits done. BUT, know what i did take a beatin on?? Stockin up on 40 gallons of gas for my generator before Katrina. Neccesity? Heck no! I take my family camping sometimes where the whole sopposed idea of fun is being in a tent WITHOUT generators and such!But I got 40 gallons of gas last week cuz I wanted lights, video games, and COLD BEER and cold pops for my kids without haveing to pay those SCUMBAGS GOUGERS for bags of ice....oh wait...i paid the scumbag QuickieGasMart guy for the gas.....damn. Im a victim. And I'v been a victim for the last 9 years in Detroit and dont know why the Governer didn't declare a state of emergency every winter for roofing companys and tell you the CONSUMER it was Illegal to PRICE GOUGE me and that you had to pay the same going rate per square that it was 3 months before! And Im reporting my local plumber who charges me triple when I call him at 7 pm cuz i got a backed up sewer and hes profiting of my disaster and needing it NOW. And the locksmith for the times I was an idiot and locked my keys in the car and payed out the butt for 2 minutes of his time! And DHL Delivery Service when they charged me $380.00 to have a document delivered 250 miles away in 3 hours, heck, when they put it in the sack on the plane with the other stuff they probably paid $200.00 for the whole package and my envelope was 1 out of 50 therefor costing them $4.00. And im turning myself in for taking advantage of the airlines and booking my flights on off peak days when theres not as much DEMAND and gittin my tickit for half price, and booking hotels in the off season when theres a big SUPPLY of available rooms and not enough DEMAND. So, when I sold my generators for $1,400.00, as said, no one had a gun to there head, and many people who had the money decided not to buy one from this here SCUMBAG, but, there were 23 people in Florida after Ivan who were very happy for the next 3 weeks when they were sittin pretty while there neighbors were without, and who think it was money well spent. In fact, when I came back down several weeks later with my crews, we did a few of there s roofs, and remain real close friends with a couple of them and our kids play together. And by the way, if I wouldn't of had one after Dennis, I would have paid double what I had charged rather than my family go without our creature comforts.
Well, I know I ramble alot, and I probably will check back to see whats said over this criminal pricing...He He. Later
Come back when you learn what a paragraph is. Nobody can wade thru that mess.
You just said that there's no demand, but there is "desperation". So which is it? If there's "desperation", then I'd say there most certainly is demand, and urgent demand at that. If, on the other hand, there's no demand, then there can't be any desperation to take advantage of. The gas station owners are wasting their time even opening in the morning: nobody wants their gas, so they might as well go home.
I must admit I do complain at the price of beer at the ball game.
You may be a Freeper, but you are not someone I would want to know personally. To compare beers and sweaters to gasoline which is essential to our way of life here in the U.S., is ludicrous. You seem to have no moral compass. You and flashbunny. Not worth discussing this with either of you as you are both cast in your freemarket uber alles concrete.
Right On! Thanks...
[I]Would you rather be able to buy gas at $3.50 a gallon, or not be able to buy gas at $2.50 a gallon?[/I]
Welcome to FR!
I must say that is a great post, but try next time to add some paragraphs. It was hard on the eyes!
"The gas station owners are wasting their time even opening in the morning: nobody wants their gas, so they might as well go home."
I'm sure you'd prefer to have them open and charge $15 per gallon. After all, the sky's the limit! Get filthy rich, but then of course, you have to be able to sleep at night. However, I get the feeling you would sleep like a baby, as the almighty dollar trumps all other considerations.
You're not making sense. You just said THERE IS NO DEMAND. That means nobody wants gas. If the owner opens his gas station and charges ten cents a gallon, it won't matter: there is no demand for gas, so nobody's going to buy it.
Production of goods are essential to the US. Steel, autos, cement, chemicals and electronics are all essential. Our government should not be decreeing prices and wages, that's Communism. Is gasoline so important to the US that a Cabinet position be created? Should we vote in "Gas Czar" to run it?
"uber alles"
America lived through ration cards and price controls. I'm sorry but that was the age of what you are attempting to convey by using "uber alles." That was top-down administration affectionately used in dictatorships.
Meanwhile, as I already pointed out, many people shocked by the sight of seeing generators being sold for (not just priced at, but SOLD for) 1000% markups are going to be motivated to go buy generators at "regular" prices after things get back to normal, so that they don't get screwed price-wise (or stuck without) the *next* time a hurricane hits.
OK Mr. Punitive, as if a shortage wouldn't do the same thing? Methinks you a bit TOO zealous in scraping up reasons.
Are you even READING the posts, or just not comprehending them? No the s"ky is not the limit" because the station across the street is selling gas at a LOWER price. Get it?
I never done know a going out of Bizz sale that the going out of Bizz bizz didn't choose to put on.
ooooooh, the troll got banned
The laws of supply and demand have never been repealed. I would FAR rather be able to buy petrol at $20 a gallon, trading 20 pieces of green paper for the ability to get my family to safety, than to be unable to get petrol at $3 a gallon just to make you feel better. Bleeding Heart Socialism has killed six times as many people as the 1918 Doomsday plague did and people STILL DON'T GET WHAT'S WRONG WITH IT.
I change my mind. Maybe TRZ better too. If Terrikiller likes it then there hasta be sumfin' wrong.
Ichneumon, endthematrix, Flashbunny et al - kudos to you!
You guys are fighting the good fight here. People like you make FreeRepublic great and give it its high truth-to-noise ratio! Keep standing up and speaking out against these lethal socialist memes and shibboleths!
Gouging is impossible in a free market. Gouging is simply a term for charging what the market will bear, which the single most important element in getting goods and services to the point where they will do the most good. After Hurricane Andrew the MSM and a lot of really dumb politicians were wringing their hands because the price of roofing materials had gone up 5 to 10 fold. This so called price gouging laste only a few days as these apparent bonanze got roofers and lumber streaming to Florida to take advantage of this gold mine. WIthin a few days there were so many roofers and so much lumber available the price when back to normal. Had prices been controlled there would have been no incentive for roofers to head down to Florida to make extram money.
Yep. Exactly. Ritz Crackers at $10, or nothing for $1.50.
I'm sure the people of NO would gladly pay up for a little comfort and sustenance, if only it were legal (well, I'm sure they are anyway). And I'd bet you'd see those who have the means to pay up sharing with those who did not (and didn't turn into savages).
Well, no, you might not see it, because it would do too much to discredit socialist docrine, so the media probably wouldn't allow it to be shown.
>>>>Would you rather be able to buy gas at $3.50 a gallon, or not be able to buy gas at $2.50 a gallon?
The biggest problem here is the lack of a physical manifestation. I always used to think gravity sucked when someone planted me in turf during rugby matches. There isn't an overwhelmingly obvious physical analog to point out economic laws with so people try to deny their existence when they lead to unpleasant consequences.
It's always tough arguing emotional issues with people who are getting hosed by the market.
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