Three Cheers For "Price Gougers"

TechCentralStation ^ | September 2, 205 | Rand Simberg

[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.

[savedbygrace]

Agreed.

[NRA1995]

"Some analysts warn move may spur supply problems."

Read: analysts with whom we strongly disagree and would throw into dungeons to silence them

[Red Boots]

Florida has had an anti-gouging law since Andrew and we haven't seen the slippery slope you're talking about. There does seem to be a decrease in scum of the earth who show up to take advantage of people, though.

I don't understand how any voluntary transaction between a buyer and a seller can be characterized as "taking advantage of people"? It's a voluntary transaction, by definition one cannot be taken advantage of when undertaking a voluntary transaction.

It seems to me like the definition of gouging, or "taking advantage of people" boils down to no more than people paying more than they would like to.

[billbears]

The author is calling for not capping prices and letting the market handle the situation. That's a conservative approach. What's the error in this article? Perhaps the liberal governor of Georgia could have done with reading this before signing the legislation he did last week. As other politicians, Democrat and Republican, could have done so as well before practically threating 'price gougers'

But like all politicians they play to the simple who want the government to think for them and to take care of them. I just hope the gas station in Atlanta made a killing off $5.87 gas

[staytrue]

LEAVE THE MARKET ALONE.

The ability to gouge is not the logical market result of supply and demand reaching equilibrium, but the result of a temporary monopoly and a desperate, irrational, consumer whose life and limb are threatened.

The market does not work in these cases, because there is no market at all.

[savedbygrace]

Does your State not have anti-price-gouging laws?

My personal approach to retail operations that make large price increases at times like these is to NOT buy from them in the future, after things have calmed down.

There are three stations in our little town that I have not purchased gasoline from since 9/11, when they knee-jerk upped the price for no real reason, other than panic anticipation.

It's amazing the way all the gas stations here seem to set their prices to the same price on the same day, WITHOUT ANY PROVABLE COLLUSION. Simply amazing.

[Tax-chick]

But like all politicians they play to the simple who want the government to think for them and to take care of them.

Way with words, billbears!

[Red Boots]

So should electric companies be able to sell their product to you for whatever price you are willing to pay? That would mean huge sections of the country would go dark overnight. A free market is not always the best for the common good

How ridiculous !

100 years ago, electricity was only available in New York City. Now it is available everywhere. It got that way not because of government actions, but because private utility companies,acting under free market conditions, used their profits to expand into unserved areas, so they could increase their profit base.

By contrast, those countries, like the Soviet Union, where everything was "regulated for the common good" still have large scetions without any electricity. The government, which was based on the idea of serving the public good, had no money to expand service to those areas, so it didn't.

[flashbunny]

If only we could emote our way though life, not relying on facts or the laws of economics.

Try filling your gas tank with good intentions when the government puts price caps in place to prevent gouging.

AGain, I put two questions to you, since you seem to have taken over in the "emotion over logic" vitriol spewing.

1: Would you rather be able to buy gas at $3.50 a gallon, or have no gas to buy at $2.50 a gallon.

2. Please explain your brilliant anti-gouging proposal, and explain exactly how you would legally define gouging, and what penalties you would set for someone convicted of it.

Also explain how you would set up your system to prevent the shortages, gas lines, and other problems that always occur when you set artificial price caps.

Or should I not hold my breath and expect you to only spew petty, childish insults?

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.

[flashbunny]

"and you sound exactly like the "educated" liberals who boast a diploma in place of morality.. a brain won't keep you from going to Hell.. but a heart just might."

Ah, good, can you be like the others and give me some bible quotes, too? That really backs up your position. Let's ignore history, let's ignore every disastrous time the government capped prices, and do it again...because otherwise we'll all go to hell.

Talk about a sign of a weak argument. Why don't you just call me a price gouging nazi....or is that the next step?

[freepatriot32]

Libertarian ping.To be added or removed from my ping list freepmail me or post a message here

[traviskicks]

The good Dr. On Florida Price 'gouging', by a 'Republican' (Jeb):

http://www.townhall.com/columnists/thomassowell/ts20040914.shtml

[IronJack]

Why do you assume that anyone who criticizes gougers is advocating government regulation?

[flashbunny]

because they usually call them criminals, which means they want a law against it, which means they want government action.

They praise anti-gouging laws, but when asked for specifics on their proposal to prevent 'gouging' but maintain supply, they clam up.

Anyway, it's easy to criticize. It just takes a computer and an internet connection, and the whole world will hear your whine.

But it doesn't do any good. It's just a waste of everyone's time. Demonizing a person who is taking risks and supplying goods people need isn't productive. It's a counter productive witch hunt.

Hell, I could respect them more if they offered or supported a government plan. But petty complaining and whining while offering nothing constructive is just childish.

[konaice]

The market does not work in these cases, because there is no market at all.

If there are no markets, then there can be no gouging. QED.

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

[IronJack]

It seems that in the past government has regulated profiteering, with some measure of success. Not that I'm proposing such a plan, but doesn't it seem cavalier to just discount the notion entirely, especially on the grounds that the free market will always work better?

[flashbunny]

"It seems that in the past government has regulated profiteering, with some measure of success. "

Some measure of success?

The gas lines of the carter era? What 'measure of sucess' were those?

Anything the government does to artificially limit the free market is a recipe for disaster.

[flashbunny]

the following is from http://capmag.com/article.asp?ID=1164

Even the Department of Energy's study found that price caps -- which, let's not forget, are what got California into this mess in the first place -- won't improve the energy situation. In fact, they'll likely make it worse.

The study concluded that a $150 "hard cap" on electricity bills -- like the one proposed by California Gov. Gray Davis -- will make it much more costly to produce power, leading some companies to shut down. This could wipe out as much as 3,600 megawatts of generating capacity in the state. That's enough power to keep the lights burning in more than 300,000 homes.

And the most popular alternate price-fixing scheme -- a "Cost-Plus-$25" proposal -- would discourage "only" 1,300 megawatts from being added to the state's capacity. Reasonable people may disagree on how to solve California's crisis, but surely no one would argue for less capacity.

Price caps also "could double the number of rolling blackouts from 113 to 235 hours and increase the number of households in the dark to about 1.575 million," the study says.

Mere guesswork, critics may respond. Fine, but they can't shrug off what history teaches us about price caps. It's all laid out in a book published more than 20 years ago by The Heritage Foundation titled "Forty Centuries of Wage and Price Controls: How Not to Fight Inflation," by Robert Schuettinger and Eamonn Butler.

The book outlines the unqualified failure of price controls from ancient Egypt forward. Consider what happened when the Pharaohs, under the guise of preventing famine, tried to control the wheat supply. Over time, control gave way to direction and direction to outright government ownership. Farmers, with no profit motive left, produced less and less wheat until -- surprise! -- famine set in. The economy collapsed, workers abandoned the cities and, finally, in about 3000 B.C., the reign of the Pharaohs ended.

Hammurabi's legacy to the world is that he authored the first-ever formal written law codes. But his legacy to the Babylonian empire is the extensive wage and price controls he included in that first code. They weakened the economy so much they eventually brought down the empire itself.

The Roman emperor Diocletian tried wage and price controls in an effort to right the market after earlier price controls had failed. In the fourth century B.C., the Roman government bought corn and, in times of shortage, re-sold it at a low fixed price. In 58 B.C., it went further and granted every citizen free wheat. Farmers began streaming into Rome because they could live and eat without working. By the time of Julius Ceasar, one in three Romans was receiving government wheat.

The government tried to fix things by coining more money. But that just added skyrocketing inflation to the mix. Diocletian imposed wage and price controls and ordered that anyone who violated the controls or withheld goods from the market be killed.

The result, in the words of one historian: "The people brought provisions no more to market, since they could not get a reasonable price for them, and this increased the dearth so much that … the law itself was set aside." Soon thereafter, Diocletian found himself set aside --forced from the throne after just four years.

Then there was the former British colony of Bengal. In 1770, its rice crop failed, and the government imposed price controls. A third of the population died in the ensuing famine. Nearly a century later, Bengal again faced famine. This time, the government encouraged speculation in rice. Merchants went elsewhere to buy rice, brought it back to Bengal, sold it at a profit and averted the famine.

Americans haven't been able to resist the lure of price controls, either. From the time of the Continental Army, when price controls nearly brought a ruinous end to the American Revolution, to the 1970s, when President Nixon attempted to overcome creeping inflation with wage and price freezes, American consumers have taken their lumps from these failed policies.

So will Congress listen to the Department of Energy and to history? Or do we again have to learn this lesson the hard way?

[IronJack]

You've jumped the argument from one of oil to one of electricity, but let's assume the commodity being sold is irrelevant.

How does putting a price cap on electricity make the electricity "much more costly to produce"?

I would also think that temporary price controls -- "anti-gouging" legislation -- falls under a slightly different set of constraints than indefinite wage/price regulation.

I'm having trouble understanding how gasoline which was being sold profitably for $2 a gallon is suddenly not profitable unless it's being sold at $6 a gallon. Or how jacking the price to $6 a gallon is actually doing consumers a favor by discouraging them from buying, so there'll be gas available to those who need it. That is only true if "those who need it" happen to have $6 a gallon for their gasoline.

For a tactic that was implemented to discourage consumption, the price gouging in Atlanta seemed to have exactly the opposite effect. Lines formed around the block, and stations sold out for the first time in decades. And that was after the price tripled overnight.

I wonder if some of these fantasy market pressures are actually just greed dressed up in an economist's suit. Pure, raw, unbridled moneylust would go farther toward explaining the recent gas price surges than any market mechanism.

Again, I must stress that I'm not arguing for price controls, or government intervention of any sort. But it seems to me that some of the reasons for rejecting that suggestion are pretty flimsy. Or maybe I just misunderstand this whole free market argument.

[OCgolfer]

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

The economics courses I took in college were really eye-opening to me. Probably the best courses that I took in college because they are so relevant today. I suggest people read a few good books on micro and macro economics. Sorry, I don't have any specific books to recomment but probably if you look for authors Milton Friedman and Adam Smith, you won't wrong. Read up and maybe more people will understand what we're all talking about.