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.

[flashbunny]

--- ...and as a side effect, there are fewer generators available when they're really needed, *and* fewer people plan ahead and buy a generator before the next emergency, fueling deeper shortages when the next hurricane arrives.

I don't see that as an improvement.---

You fail to see the real benefit of anti-gouging laws: It makes the citizens FEEL better. About themselves. About the government that panders to them.

The actual results don't matter. What matters is that they had good intentions when they passed the law!

Who cares if a diabetic needs a generator for insulin because his old one broke down after the storm. He might have to pay 3 times retail cost for it! Thank God the benevolent government is there to protect him from being gouged like that!

(BTW, the benevolent government will be by in 7-10 days to pick up his dead-from-diabetic-shock body. Please leave it by the curb, covered in a blanket. Thank you. Signed, The government.)

[Moonman62]

But you're missing the fact that in that case, the market fixes things by addressing the *other* side of the equation -- when people rush to buy things at "sharply" higher prices, this prompts suppliers to fall all over themselves to rush to bring to that market "sharply" higher supplies (for the obvious reason that they want to reap a lot of revenue).

I bet a lot of now defunct companies wish they would have issued more stock in the late 1990's. But most of them didn't because they wanted the prices to keep getting higher and higher. Theory doesn't always work in practice. It doesn't work in the gas example either. They can't come up with more supply because it's been broken by the hurricane. Coming up with more supply at this point is more a function of the time it takes to get men and equipment to fix things than the price at the pump.

[Ichneumon]

[Actually, "Economics 101" says a lot about this]

And proceeds NOT to.

Perhaps you should try addressing my points, instead of snipping them all out and then dodging them with a bizarre transparent falsehood.

The astute reader will note that I explained what "Economics 101" actually does say about the topic, and then "The Red Zone" felt compelled to pretend that it doesn't.

Oooookay...

Meanwhile, for those capable of basic reading comprehension, I highly recommend:

This book is over fifty years old, but is *still* perfectly relevant today, and still the best single introduction to the fallacies of various kinds of government intervention in the economy (including price controls, minimum wages, rent controls, and others).

[gpapa]

Nor should it be. Tell that to people who are ignorant of Econ 101, or just plain common sense, and they will shrug and say they can make it up by selling convenience items. Go figure. It is difficult to argue with people who think they are getting ripped off by people with black hats and fire and brimstone in their eyes, especially on FR where the given name is Free.

[flashbunny]

I'm still waiting for your brilliant anti-gouging law proposal

You've managed to post about 10 times since I've asked for it. If you're so brilliant, if you know all, why don't you enlight us poor, free-market minded folks here?

Come on, show us your brilliance! Or are snide comments all you have to offer?

We're stil waiting.

[The Red Zone]

Who cares if a diabetic needs a generator for insulin because his old one broke down after the storm. He might have to pay 3 times retail cost for it!

If, in fact, he has a confiscation-liable wad of cash handy. (And anyhow, a bag of ice wrapped in a blanket should suffice; a generator is way overkill.) Generally when there are humongous disasters like this, you will see a rush of supplies sent in FREE by various companies and agencies.

[flashbunny]

we're waiting.

[flashbunny]

come on, you can reply to my other comments, and to other people, but when I ask you to show your economic genius and provide us all with a fool proof anti-gouging law, you suddently clam up.

Why is that?

[The Red Zone]

That says nothing about the impulses to "buy high" except to claim that the high prices will stop them.

[Moonman62]

"It is essentially the same story when stores are selling ice, plywood, gasoline, or other things for prices that reflect today's supply and demand, rather than yesterday's supply and demand. Price controls will not cause new supplies to be rushed in nearly as fast as higher prices will."

Thomas Sowell is a great guy, but he is mischaracterizing the law in Florida. It isn't a price control. And while the AG may get many complaints few of them get prosecuted.

[garandgal]

I have a question. I've always agreed with you on the immigration threads, and I know you are involved in the market...are you VERY familiar with the oil and gas market?

The reason that I ask is that I just read, on another thread, that Treasury released "dyed" diesel (used by agriculture) for use in trucking.

Our harvest starts in about one week; and we have diesel contracts. We cannot afford any shortages (as we are obviously working with a very limited time frame).

Do you have any idea what this will do to the diesel market, as far as supply? What happens if you have contracts for delivery?

[The Red Zone]

The best one is not a law at all, it's shame.

[flashbunny]

Sorry, no experience there. I haven't looked into the dyed diesel news enough to even offer anything on it.

Good luck though. What are you harvesting?

[dalereed]

" However, before Andrew, human dirt would show up and corner the market in something like power generators and then sell them after the storm for a 1000% markup. That doesn't happen anymore."

Stopping it is wrong. The guy is entitled to the markup from anyone that is willing to pay the price. Where do you think anyone has the right to dictate the price someone is asking for a service or commodity.

No private citizen owes any one anything.

[flashbunny]

"The best one is not a law at all, it's shame."

Wow, that's profound.

And it's probably the best you have to offer.

All talk. You know better than world renowned economists.

But when you are asked to prove yourself and your position by offering an actual proposal, your smart mouth suddenly clams up.

Expected. All hot air. Nothing to show for it.

Maybe you should slink away now. Speaking of shame, that should be the sensation you're experiencing now.

[Ichneumon]

[and as a side effect, there are fewer generators available when they're really needed,]

Someone has yet to show how arbitraging locally increases the total number that the people get.

It has been shown several times on this thread, and countless times in the real world.

First, if someone's making money selling generators at 1000% mark-up, a *lot* of people (both traditional suppliers, like the owners of hardware stores, and regular citizens) are going to realize that they too can make a lot of bucks by breaking their humps to go get more generators, overcoming all obstacles, to sell for "high" prices as well. Additionally, many people who already have generators that they don't need are going to say, "damn, I should drag this thing out and hang a 'for sale' sign on it for more than I paid for it, then buy a replacement next month after things settle down"... And countless other variations on that same theme.

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. This increases the total supply of generators on hand the next time there's a disaster. Besides "freeing up" the in-store stock for even more people in need next disaster (i.e., the people who have now bought more generators will not be in competition with the folks who still haven't yet gotten one), it means that more people *have* generators (either previously bought, or newly bought) during the next emergency when large numbers of people need them, *and* adds to the pool of folks going, "wow, my power didn't go off this time, let's sell/rent this sucker to those who do need it" next time around, and so on.

Finally, the memories of folks who made 1000% markups on generators last time around will spur more people to lay in larger stocks of generators in advance of the *next* disaster.

*That* is how arbitraging locally increases the total number that the people get...

[unseen]

I agree with the post to some degree. However what many free market people fail to understand is that gasoline is not a free market.

It is a vital part to our lives. It is as vital as electricity and phone service which are both regulated.

We NEED GASOLINE and will pay almost any price to have it. Without GASOLINE most of America can not go to work. Major companies/airlines would fail.

There are very few companies which drill pump and refine gasoline due to the high costs of this process. Most of the world's oil are in the hands of a very few nations Known as OPEC who does not use the supply/demand economic model but will set production at a certain price target and will reduce supply i.e. output to get this price this in classic economic theory is called price fixing. Price fixing only can work when there is no competition to speak of.

Thus you have a product which has almost unlimited demand. Which people will pay almost all their expandable money to get and at the some time you have OPEC and the oil companies creating bottlenecks and artificial supply reductions to keep the price stable. It is no wonder that when you add an unforeseen event to this calculation the whole system fails.

There is no reason why the US has not built a refinery in 30 years. The oil companies blame the environmentalists but they have NO incentive to build a new refinery this would increase supply and drop the price. The OIL companies should be regulated just like the electric companies. The electric companies make a profit, they repair and upkeep their lines they pay dividends and they have to request price increase which most are approved. This cause the electricity to be stable in price. Exxon made 32% more earnings in the last 3 months year over year. You can not have a company that is vital to you Country's survival under the control of stockholders who only can about the next 3 months profit. This does not promote redundancy pipelines new refinery production, nor as we have seen increase in exploration nor does it create an incentive for new technologies This creates a very low risk environment One final not if gas station must charge more for the product then they bought it for to be able to buy the next batch why do they not sell for less then they bought it for if the next batch is going to be cheaper. the price rises with the market true but it never falls with the market. It falls very slowly if ever. Oil companies will charge higher prices until an economic impact is felt then the will lower prices.

[nopardons]

bttt

[flashbunny]

"Can you refer me to the econ text in which you found this nugget of brilliance?? I'd appreciate it as I need a break from the lunacy of Williams, Friedman, and Sowell."

Who needs proven economic theory, when you can offer platitudes?

The (socialist) red zone should be slinking away from here, tail between legs.