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.
You still have not defined "price gouging." In order to accuse someone of "price gouging" you need a definition of price gouging. You cannot enforce a law fairly based on subjective opinion.
You still have not defined "price gouging." In order to accuse someone of "price gouging" you need a definition of price gouging. You cannot enforce a law fairly based on subjective opinion.
Give it up. Subject closed. Talked to death.
Zero, Thanks for posting this.
Bunny/Zero, We have a local morning radio show and for the last week or so they have been railing about gas prices. They have made statements that they understand supply and demand and then rail on the huge profits the oil companies are making off the backs of the people in the disaster.
Well, this morning in their first news segment they covered a story about gas stations not raising their prices due to fear of prosecution for "gouging". Then a story or two later they covered a press release that asked that people not come to the Gulf to help with the efforts. This was due to there not being enough GAS to power all the vehicles being brought there.
They couldn't get the connection that the use of the inability to raise prices was causing the use of the scarce resource to occur in an area where it was not needed.
Anti price gouging legislation prolongs suffering!
"In the area of the disaster, such as in NO, the demand would not remain the same, as everything is underwater and unusable. And the town is a ghost town, so there is no demand to be had, as there will be no people to demand it. NO is dead, for all ostensible purposes."
Do you not see the use of resources in the rescue missions? Can you see the connection between the lower prices out of fear for "gouging" prosecution and the fact that there is not enough gas available to use all the equipment that is being taken to the gulf?
"However, you have just set up the perfect condition for price gouging, haven't you. At least amongst unconscionable shysters who would financially attempt to feed off of other people's grief. Do you include yourself as one who would price gouge? Profit off of people's desperation? Are you one of them?"
In your first statement you are stating that there is no shortage because there is no useage, now you are stating that the "gougers" are taking advantage of these fictitious users. How does someone take advantage of a person that doesn't need the resource?
"If they waited until next week, or the week after, they might be justified, but not this week."
If they waited until next week, how would they pay for their full tank? With the profits they make this week they could only afford to fill 3/4's of their tank.
Which do you want? The inefficiency caused by only partially filling tanks, or the higher price this week so they can afford to fill their tanks all the way?
The station owners are not on a cash-only basis. They have terms, which means they can have the fuel delivered and sell it before having to pay for it. That's the plan anyway.
"Yes, to put in their cars that are underwater."
Or in the boats used for rescue, or in the chainsaws cutting thru roofs, or in helicopters, or generators, or....
Why are you so selfish that you are unwilling to deal with the price increase that forces you to change your habits, while the market tries to reallocate fuel to the disaster area to be used for rescue efforts.
Price restrictions legislation are the most cruel steps you can take. Your kind will do nothing but prolong the suffering of your fellow Americans most affected by this disaster. In fact, your selfishness may cause unnecessary deaths.
Price controls cost lives!
Note that Ayn Rand doesn't define libertarian thinking. She's a particularly rabid example. One can be libertarian and a devout Jew or Christian, for example. Such a person would believe that he has a personal obligation to help others, but that others do not have the right to take from him by force (including the government). This is in fact scriptural: the same God that said, "open your hands wide to the poor", also said, "thou shalt not steal", and indeed, "thou shalt not want anything that belongs to thy neighbor."
In fact, your selfishness may cause unnecessary deaths.
I most respectfully request that you go screw yourself to a wall. The discussion is over. Live with it.
and you see what happens when you try to shake the 'compassionate' from their bizarre reality - they go on attack and call you names and worse.
Real compassionate human beings there, eh?
You have it at the essence - market pricing and increases during shortages cause people evaluate how much of a product they truly need. "Do I need to top off my tank today or should I wait in case the price goes down" or "do I really need 15 gallons or can I get by with 5 gallons for now?"
Instead, with price controls, those choices never have to be made, and it becomes a mad dash for underpriced goods. People who don't really need something buy it because they can, and those who really need it often get left without.
But he, your'e an evil capitalist if you understand how market forces and human behavior interact. You should stick your head in the sand and sing kumbaya!
but that others do not have the right to take from him by force (including the government). This is in fact scriptural: the same God that said, "open your hands wide to the poor", also said, "thou shalt not steal", and indeed, "thou shalt not want anything that belongs to thy neighbor."
You biblically make my point. "The shalt not steal" applies directly to price gougers who steal from those that are vulnerable in times of crisis. "Thou shalt not want anything that belongs to thy neighbor", which includes the money your neighbor has earned that is being stolen by shyster price gougers, durimg dire circumstances, because they can get away with it. "Open your hands to the poor" means you don't become a price gouger in the first place and help your fellow man out, not try to screw him out of his money when he least can afford to be screwed. And lastly, "others do not have the right to take from him by force", such as in the forced coercion of preying upon others trapped by circumstances beyond their control, to steal their money by price gouging. All force is not defined as physical; one can force verbally and by circumstance also.
I don't find much in Libertarianism, in particular of the Ayn Rand variety, that has the milk of human kindness as the basis for their belief system. That's why, in spite of certain libertarian aspects that I myself have, a certain "laissez-faire" (leave me alone to live my life) attitude, it doesn't extend to the point that I would ever want to screw over my fellow man in a time of need, and price gouging is exactly that, and I think you know it. That's what I think.
Sorry for re-engaging the conversation. You're clearly in the grip of emotional forces strong enough to overpower any sense of reason.
Sorry for re-engaging the conversation. You're clearly in the grip of emotional forces strong enough to overpower any sense of reason.
I find it interesting that you think the lack of any emotion is a good thing. How in heaven were you raised? You claim you can be a good Jew/Christian, and yet justify price gouging of your fellow man. Does not compute. I'll stay with my reason and emotion combo, and you stay with your reason and money and market forces trumps all opinion. I like mine better, thank you, and I believe your belief system is in deficit. Each to their own.
In this case, I merely claim that hysteria is a bad thing.
You claim you can be a good Jew/Christian...
If I really claimed that, I assume you would know whether it was a good Jew or a good Christian that I was claiming to be.
and yet justify price gouging of your fellow man.
Actually, you're begging the question: am I justifying price gouging? The first order of business is to prove that it exists. If you consider any price increase to be "gouging", then we're off to a bad start: you would be saying, then, that we must crank all prices back to their lowest point in the past 100 years, say. If you make the at least semi-reasonable claim that some increases are legit, and some are "gouging", then we need to discuss how we tell the difference. Currently, the way you tell the difference is to consult your somewhat hysterical emotions, and decide how the price makes you feel.
Each to their own.
I suppose. The sad thing is, your way is likely to be implemented by politicians, and it will kill people. But at least you'll feel better.
"The discussion is over. Live with it."
As long as you feel better while needless deaths occur.
Fact: Fuel prices were held artificially low for fear of prosecution.
Fact: There is not enough fuel in the disaster area to run all the equipment available to save lives.
See the connection?
Your emotional well being is now considered more important than the market natural ability to reallocate resources to the greatest needs. Your emotional well being is now considered more important than the physical well being of those affected by the lack of resources. That is pure selfishness. Your selfishness is prolonging other's suffering.
Which is more evil? The capitalist or the emotionalist? Which has caused more suffering?
Are you a gas station owner? My guess is that you aren't. I used to manage one and it was a COD business. Many other threads have had the same information from FReepers much more familiar with the industry than either of us. However, if you are a gas station owner, then I'll listen to your experience.
All I did was use emotions to counter their emotions. Just an absurd example to show how quickly our society would devolve if it were run using emotions instead of natural market reactions. They came thru quite nicely.
Are you talking about independents or franchises?
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