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.
The hardware store priced so low at the time of real need that had not that sharpie come and and properly priced the inventory, likely most of the folks who would have bought the generators would not have used them to the extent that the more needful buyers did.
IOW, some old lady with a dozen cats to run her AC and some upper-middle-class family needing to run their pool filter, etc would have been the buyers would have taken away a generator needed by a nursing home, or a generator needed by a plumber to run his tools and pumps to fix many homes.
Hooray for the sharpie! He served a important piblic good! (Bad the law that drove him away.)
LOL! AS my dear old, late Daddy would say, "Horse hockey"!
Allocation by some allocation board or authority does not scale well at all -- it works for a small number of resources and a small number of well-known of users, but becomes both expensive and ineffecient after that. And it's rare to find situtations outside of the interior of households and small cohesive organizations where users and usages are well-known enough to allocate well, to allocate better than free market pricing.
Laws against gouging and laws that setup price controls create situtations of dread shortage and complete unavaility usually exactly when scarce goods are most needed.
"a bit defensive for someone so sure of your position.. for someone so educated it's a shame you are so angry..all your so called "facts" won't help you on judgement day, and not believing won't save you either.. but hey.. it's your eternity."
No, just tired of people who bluster along like they know what's best but have nothing to base it on. After they get called on that, they try to put the discussion on another tangent. Then, they cite moral authority and tell the person they disagree with that they're going to hell.
It's happened on another thread like this. It's a pattern.
If telling someone their position is evil and that they're going to hell for it was all it took to win debates, then there's no real reason to rely on logic, facts, or history, is there? We all can just pull out the "eternal damnation card" and quickly win the debates.
I can see it now.
Post #1: "I'm in favor of the flat tax. It's fair and it's simple"
Post #2: "I'm in favor of a national sales tax. It will encourage saving."
Post #3: "A flat tax and a national sales tax will punish the poor! The bible says to help the poor! YOU ARE BOTH GOING TO HELL!!!!!"
Wow, thanks for intoducing us all to a simple, effective system for winning every discussion!
Horses don't play hockey. They can't skate and wield a hockey stick adequately at the same time, Ma'am. And I think they are colorblind to boot, so how would they know if they crossed the blue line?
I see you've replied to other posts and other threads, but failed to answer my simple question for some reason.
Come on, step up to the plate and read my post #271 and tell me the simple fact: "Who owns the ladder"???
Florida has had the law for years including all the hurricanes for the past two years. We haven't had any notable shortages to make the news. It's worked well. Do some research into how it's worked in practice, not theory. It doesn't set price controls, not even de facto ones. It allows the market to work where it still works, and it allows the crooks to be prosecuted.
It doesn't set price controls but it allows the crooks to be prosecuted??? On what basis is a "crook" prosecuted? Because he set a price too high, correct?
I think I need a drink.
I guess when a man points a loaded gun to your head and demands your car, you don't have to give it to him either.
The sharpie came in and created a monopoly and took advantage of that temporary monopoly. Monopolies are bad and need to be regulated.
That would be considered stealing. Someone forcibly taking someone else's private property.
I spoke with my Sis today; we have contracts and already stored fuel (on the farm) totaling about two-thirds of what we will need.
The other third might be dicey...we will probably be able to get it since we are a larger customer...but it might be expensive, depending on the situation in mid-October.
That's pretty scary. Tell me, should he also be thrown in jail if he decides he doesn't want to sell his $6 gas for $3 and decides to close the gas station?
Talk to him about it. He's the one who set this policy. He's already nailed motel owners who have gouged the public during hurricanes. A good policy indeed.
A hurricane is about to hit or has hit an area. A family seeks shelter in a motel room some miles out of the way of the storm. The motel room normally charges $80 per nite for the room. However, with the impending (or already occurring) hurricane, the motel jacks up the price of this room to $200 plus dollars per nite. Smells like gouging, doesn't it. Most people of common sense know gouging when they see/experience it. Glad Jeb Bush sets policy in FL and not you.
They still have operable cars and are using them. You are concentrating on the 10% who did not. Secondly, the 10% still are actually demanding gas from the system -- although indirectly. How did they get to Houston? Did they walk or did they ride in a vehicle? How does their food and other necessities constantly arrive at their new location to keep them supplied? Carrier pigeons?
We are talking about the area where the hurricane struck, not the price of gas in Houston, where there would not be an incentive to gouge as the rest of the Houston populace would get very annoyed. And, in the hurricane area, any cars left would be underwater, inoperable, and if they were operable, the car owners are elsewhere and won't be coming back to NO to drive around the city for a very long time, as there is virtually no city. No customers, no cars, no gouging.
Then why is the $6.00 a gallon gas in Atlanta? (Hint: think of where the pipeline from Louisiana goes).
Then why is the $6.00 a gallon gas in Atlanta? (Hint: think of where the pipeline from Louisiana goes).
Aren't you tired of belaboring your pointless point? I'm tired of you doing it. Repetition is not a virtue. Go argue repetitively with yourself for an audience. You'll have a lot of fun I'm sure.
I was trying to explain this to someone today. An Oil guy said that their is no way they would lower the price. The supply is NOT their. If they arificially lowered prices people would use MORE gas and then we will RUN OUT. Instead of making 4 trips to do errands, combine thme into one. But that requires planning and disciline.
"Talk to him about it. He's the one who set this policy. He's already nailed motel owners who have gouged the public during hurricanes. A good policy indeed."
I heard on the news today people in florida are waiting in line HOURS to buy gasoline. Some people are waiting in front of gas stations that are closed, just in hopes that they'll get some gas in.
Yes, the policy is working brilliantly.
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