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09/14/01: Some gas stations were charging $5 a gallon.
Posted by: grundle2600@hotmail.com (grundle)
The very term "price gouging" is used by people who don't understand the function of prices in a free market economy. Prices are the most efficient method that buyers and sellers have of communicating information with each other.
When I first heard that people were paying $5 a gallon for gas a few days ago, I knew that this would be a very, very temporary thing, because there was no interruption in the supply of gas. People were falsely worried about there not being enough gas. These people panicked because they don't understand economics.
But here's the thing: if everyone buys a one week supply of gas all on the same day, then for the next 6 days, there will be a much lower demand for gas. So prices must come down.
In cases of *real* interruption in the supply, then yes, prices will rise and stay high for sustained periods of time. And this is necessary. The 1970s oil embargo, by itself, simply would have caused prices to rise. Prices would have risen high enough so that supply and demand would have been equal to each other. After all, business owners are greedy. The only reason that we had shortages, gas lines, the "energy crises," etc., was because of government price controls. Once the price controls were removed, the shortages and gas lines disappeared.
During the Gulf War, and during the embargo last year, there were no price controls, and thus, there were no shortages. Instead, prices rose high enough so that supply and demand remained equal to each other.
Price controls on gas actually make gas more expensive, if you consider a person's time to be valueable.
The whole purpose of having prices is to communicate information about supply and demand. Having the government legislate prices doesn't change the value of anything. Instead, it just causes the high price to show up in other forms, such as shortages and lines.
At any given time, there's only so much time, labor, and money that any one person has access to. Prices tell you how to best use these things. Without prices, it's impossible to determine how to best allocate resources. The abscence of free market pricing is one of the biggest reasons for the failure of communism.
Higher prices send out signals: to consumers, higher prices tell you that a resource is scare, so that you shouldn't waste it, and that you should consider using a cheaper substitute. To producers, higher prices tell them to make more of the product, or to try to come up with a cheaper substitute.
You may not like the price of something, but when a price rises and stays that way for an extended period of time, it means something, and it would be foolish to ignore that message.
Last spring, I made a post saying that Bush's energy policy was totally unnecessary. I said that energy companies would respond to higher energy prices by increasing the supply of energy, and that it wasn't necessary for Bush to do anything. And I was right. Over the next few months, suppplies went up, and so prices came down.
It works like this: scarcity >>>> higher prices >>>>> increased produciton >>>>> increased supply >>>>> lower prices.
Arguing that the price of something is "wrong" is just as illogical as arguing that the temperature outside is "wrong." It's just a number that represents information. It can't be "wrong."
Let's say that a hurricane is about to come. And there's a guy who owns a house. And he needs lumber to board up his windows. After all, his possessions inside his house are worth $50,000, and he doesn't want them to get damaged.
The huge demand for lumber causes the price to skyrocket. Normally, the guy could get enough lumber to board up his house for $200. But because of the sudden increase in price, the lumber now costs $1,000.
Now, let's say that there's a second guy, and he lives 500 miles away. There's no hurricane threat where he lives. And he already has a bunch of lumber, because he was planning to build a house. But then he hears a report on the radio that the price of lumber has skyrocketed in the city that's 500 miles away. So, simply out of greed, he decides that instead of building the house right now, he'll get in his truck and take the lumber to that other city to sell it.
But when he's halfway there, he hears a report on the radio that the city's government has decided to outlaw "price gouging" in order to "protect" the citizens. So he turns around and goes back home. So the lumber never gets to where it was so urgently needed.
So the government has prevented the homeowner from spending $1,000 on lumber. The result is that his home is not protected from the storm. So the storm destroys his $50,000 in possessions.
Thus, the price controls "saved" him $1,000, but they also cost him $50,000. Thus, the price controls ended up costing him a net of $49,000.
The price controls prevented him from spending his money as he pleased, and the result is that he ended up losing a net of $49,000.
This example shows that price controls aren't just a restriction on sellers. They are also a restriction on buyers.
Here's another example. A small town has a power failure that lasts for several days. The hardware store only has one generator. Normally, it would sell for $500. But because of the crises, a bidding war begins. The owner of a local food store has $10,000 worth of food that needs to be kept cold. So he places the highest bid. He offers to pay $3,000. So that's where the generator would go.
But then the government comes by, and says that this "price gouging" is illegal. So now, the owner of the hardware store can no longer sell to the highest bidder. Instead, he sells it for the regular $500 price. And how does he decide who gets it? He sells it to his best friend. And what does his best friend use it for? His electric shaver.
With free market pricing, the generator would have been put to its best use. But without free market pricing, the generator gets put to a much less productive use.
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09/14/01: I think 99.9% of economics professors would agree with me on this.
Posted by: grundle2600@hotmail.com (grundle)
This first thing here is excerpted from a much longer essay that I found on the web. It's from some college economics professor. The whole essay is pretty brilliant, but I'm just posting the part on free market pricing. The second thing here is a much shorter article on the same subject. The third thing is a very recent article explaining the $5 price for gas that some gas stations were charging a few days ago.
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http://www.harper.cc.il.us/mhealy/eco212i/lectures/5es/5es.h tm
Long lines in Poland
Prior to 1989 when communism in Eastern Europe collapsed, Poland and other countries had severe shortages of consumer products resulting in long lines (queues). This is a good example of allocative inefficiency. Severe shortages reduces society's satisfaction.
(3) Super Bowl tickets (another example which something new)
There is a shortage of Super Bowl tickets. Hundreds of thousands of fans want to attend the game but only about 80,000 seats are available. This is allocative inefficiency. WHAT CAN BE DONE?
Build a bigger stadium? Play a 2 out of 3 (or 4 out of 7) series? OR - why not simply raise the price? The price of a regular Super Bowl ticket is around $200. At this low price, hundreds of thousands of people want to go. But what if the price was raised to $1000 or $2000, or to whatever price will result in only 80,000 tickets being sold.
If they raise the price, there will be no shortage. SHORTAGES ARE CAUSED BY A PRICE THAT IS TOO LOW. This results in allocative inefficiency and less satisfaction for society.
(4) Natural disasters: "price-gouging"
Let's try another example to illustrate the importance of getting the price right to achieve allocative efficiency. After hurricane Hugo struck Florida a few years ago the price of plywood, water, hotel rooms, and many other things increased dramatically. Were these price increases BAD for the people living in Florida?
NO!!!!
This may seem controversial to many of you, but let me explain and I think you will agree with me.
After Hurricane Hugo, the people of Florida did not have all the plywood that they wanted, or needed. This is allocative inefficiency. To help them we would want two things to occur: (1) more plywood should be shipped to Florida, and (2) the people of Florida should try to conserve the plywood that they do have. This is good for the people in Florida.
Let's say that the price of plywood increased from $15 a sheet to $60 a sheet. WHAT HAPPENS?
Well, people standing in line to buy plywood to fix their walls, their decks, and their doghouses, will buy less and maybe decide to only fix their walls now, i.e. they conserve.
ALSO, maybe somebody sitting in the back of their pickup truck drinking beer on a Friday night in Chicago will hear a news report on the high price of plywood in Florida. And they may start to calculate: 100 sheets that would fit in the back of the pickup would cost, in Chicago, $1500 (100 sheets times $15 a sheet). If they drove to Florida they could sell the sheets for $6000 (100 sheets times $60 a sheet). This is a profit of $4500 in one weekend! Trucks full of plywood would be heading for Florida from all parts of the country. This is good for the people in Florida.
Now, let's say that the government of Florida wants to "help" its citizens by preventing this "price-gouging" - higher prices after a natural disaster. So they pass a law making price-gouging illegal. Let's assume that if you sell plywood for more than $15 a sheet you will be arrested. (See links below.) WHAT IS GOING TO HAPPEN? Does this Law help the people in Florida who need plywood?
First, if the people in all those pickup trucks full of plywood hear of this anti-price-gouging law, they will turn right around and drive home. This is bad for the people of Florida.
Also, those people standing at the front of the lines at the lumber yards, seeing that the price is still only $15 a sheet, will buy extra to repair their decks and fix their doghouses. This is bad for the people of Florida.
The result of the anti-price-gouging law is a SHORTAGE. A shortage CREATED by the law, not by the hurricane.
When the price of plywood rises to $60 a sheet after a hurricane it is allocatively efficient and GOOD for the people of Florida. They will CONSERVE the plywood that they have and MORE will be shipped in. This is good. Do you agree?
Oftentimes students say, "what about the poor people who can't afford the higher prices?" Will the anti-price-gouging laws help them?
NO, because there will be a shortage. This means NO PLYWOOD is available for anyone (unless they just happen to be at the front of the line).
There are better ways to help the poor. This is especially true if we can agree that the laws keeping the prices down actually hurt the poor by creating a shortage. The government could give the poor money, or haul in more plywood - but a law that keeps prices low hurts all.
I realize that this may be a bit controversial. If you have questions let's discuss them on our discussion forum. (When you click on the link it should appear in a new browser window.)
Articles on "price-gouging" in Florida:
http://netra.sptimes.com/Weather/92698/Gouging_complaints__r .html
http://www.sptimes.com/Weather/92598/Pinellas_put_on_price.h tml
(5) food price controls
The government-created low prices in Florida after a hurricane CREATED A SHORTAGE. What if a government keeps food prices too low? What do you call a shortage of food? -- FAMINE! Millions of people have been killed by governments that have lowered food prices creating a famine. The purpose of keeping food prices low was to help the poor and the hungry. The effects of keeping food prices low is famine. Two things happen when governments lower food prices: (1) farmers make less so they work less and grow less, and (2) since prices are low those who do find food buy more. the result is a shortage.
(6) gasoline
Different government policies concerning gasoline prices have had different effects.
(a) W.W.II
During World War II, the US government kept the price of gasoline down. This created a shortage. To handle the shortage they had to issue ration coupons. If you wanted to buy gas, you first needed a coupon. The government created the shortage. The government created allocative inefficiency.
(b) 1970s: Arab oil embargo
In the 1970s, Israel attacked its Arab neighbors and the US supported Israel. In response, the Arab oil producers refused to sell oil tot he US. This would have caused the price of gasoline to increase greatly, but President Nixon prevented the price from rising. This created a shortage. Gas stations had long lines (queues). Some would only sell gasoline on certain days or limit a purchase to 5 gallons. The government created the shortage. The government created allocative inefficiency.
(c) during Gulf War
In the early 1990's the government of Iraq invaded the country of Kuwait disrupting oil exports from the Persian Gulf. But there was no shortage of gasoline! If you wanted to buy gas you just had to drive to a gas station and fill 'er up. Why wasn't there a shortage of gasoline this time? Because the government allowed the market to work and the price increased. As a result two things happened: (1) gasoline producers did all they could to produce more gasoline, and (2) drivers conserved, carpooled, and drove less. Hence, NO SHORTAGE. This was allocatively efficient.
WHAT CAN BE DONE to achieve allocative efficiency?
In a market economy, or pure capitalism, the price will adjust to achieve allocative efficiency. Inefficiency occurs when the government interferes or if one or a few firms have control over the market.
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http://www.fee.org/freeman/99/9901/lee.html
Censoring Pleas for Help
by Dwight Lee
Dwight Lee is Ramsey Professor of Economics and Private Enterprise at the University of Georgia.
Ask people if they favor government censorship and the response will be a nearly unanimous no! Yet if you ask the same people if they favor government price controls, the response will be much more mixed. Ask them if the government should control prices to prevent "price gouging" after natural disasters, and the response will be a nearly unanimous yes!
These responses reflect an unfortunate ignorance of how markets allow us to communicate with one another. Once market prices are recognized as a means of communication, we have another powerful way of understanding why government price controls, which I have discussed previously, are a particularly harmful form of censorship. And the harm is greatest in the times of natural disasters because the victims are desperate to communicate their need for help.
The communication permitted by market exchange and the resulting prices creates a remarkable degree of social cooperation. There are no better examples of the benefits of this communication and cooperation than natural disasters. The victims need not only the assistance of people outside the disaster area, but also the cooperation of one another if they are to recover as soon and completely as possible. Unfortunately, when natural disasters strike, governments are most likely to outlaw the price signals that make this cooperation possible--and to do so with the support of public opinion.
After a natural disaster, prices generally increase sharply for labor, construction materials, electric generators, and a host of other products needed for recovery and comfort. The common explanation for these price increases is that unscrupulous suppliers are profiteering at the victims' expense. Suppliers may be profiting, but not at the expense of the victims. Those whose homes are damaged and lives disrupted are victims of the natural disaster, not of those who supply them with needed goods and services afterward. High prices are better explained as the best way for victims to communicate their need for help to those who are most able to provide it. High prices also insure that pleas for help will be met with a quick and effective response.
Sending Lumber to Miami
I heard an interesting example of such a response when I was giving a talk in Ohio in 1992, not long after Hurricane Andrew ripped through southern Florida. I had mentioned the storm and its aftermath to illustrate the importance of price communication, and a gentleman in the audience told a story about his son, a building contractor outside Cleveland who had started building the house he and his wife had dreamed of for years. The foundation had been laid and the lumber was being delivered as Andrew hit Miami. With the news of the disaster, he decided against using the lumber himself and (despite his wife's opposition) shipped it to Miami instead. Why? Because the news he found most compelling came in the form of high prices for lumber, informing him that the demand for his lumber was greater in Miami than in Cleveland.
Was the Cleveland contractor an unscrupulous profiteer? Hardly. He did far more good for the victims of Hurricane Andrew than those who sat around expressing contempt for price "gougers." True, a few people helped the hurricane victims by sending supplies to Miami for free. Certainly these people should be commended. But their help was insignificant compared to the help given by suppliers from all over the country (indeed, the world) who responded to higher prices by providing more of the things Andrew's victims indicated (through higher prices) they most desperately needed.
Those who express contempt for people who sell products to natural-disaster victims at high prices should look closer to home for someone to criticize. Their criticism (born of economic ignorance) and the public opinion they inflame frequently provoke price controls, which muzzle those crying out for help. The Atlanta Journal-Constitution pointed out last April that Georgia has a "price gouging" law that forbids suppliers from charging "one penny more than they charged the day before the disaster struck." This law was favorably mentioned, with no hint of irony, in an article reporting that building contractors and construction supplies from several states had poured into Atlanta immediately after it suffered massive tornado damage. Can anyone seriously believe that this help would have poured in from far away if the "price gouging" law had been perfectly enforced, or that the help was not reduced by the enforcement that had occurred? (Penalties for price gouging in Georgia range from one to ten years in prison and fines of $5,000.)
The Electric Shaver
Victims of natural disasters need to communicate with one another also. Market prices are the only practical method. Everyone in the stricken area will value the products being made available, but people will want those products to go to those they believe can put them to the best use. Price controls prevent this from happening by censoring communication among victims.
A friend of mine who lived in Charleston, South Carolina, when Hurricane Hugo hit in 1989 saw firsthand the harm done by this censorship. Electricity was out for several days in my friend's area, and so lots of people were anxious to get gas-powered electric generators. Unfortunately, the local hardware store had only two and was unable to get more because of price controls. But there was another problem with the price controls--one that actually benefited my friend's family, though at great cost to others. Because his father was a good friend of the local hardware-store owner, he got one of the electric generators at the controlled price. The store owner couldn't legally sell the generator to anyone else at a higher price, so why not let his buddy have it? My friend's father was delighted because he could continue to shave with his electric shaver. Unfortunately, grocery stores in town required electricity desperately to prevent thousands of dollars' worth of food from spoiling. Without price controls, one of those stores would have offered a higher price for the generator, effectively communicating (on behalf of customers) that it had a more urgent use for it than my friend's father had. One person would have had to suffer the inconvenience of lathering up to shave, but hundreds of his neighbors would have persuaded him, through a high price for the generator, that their desire for fresh food should take precedence. Of course, without price controls, all the stores and my friend's father (had he still wanted one) would have quickly secured electric generators because they would have been able to communicate with suppliers outside the disaster area.
Natural disasters provide a particularly vivid example of the harm done by price controls. Unfortunately, governments do not need natural disasters to justify undermining social cooperation and destroying wealth by dictating prices. Governments have a long history of imposing price controls on a wide range of goods and services. And they will continue to do so until it becomes widely recognized that such controls are a particularly pernicious form of censorship.
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http://www.nationalreview.com/comment/comment-taylor091401.s html
Panic at the Pump
It wasn’t price-gouging we saw on Tuesday.
By Jerry Taylor & Peter VanDoren, director of environmental studies at the Cato Institute. Peter VanDoren is editor of Regulation, the Cato Review of Business and Government.
September 14, 2001 9:30 a.m.
Amidst the outpouring of human kindness and generosity that characterized America's response to the terrorist bombings last Tuesday, an ugly note was struck by the gasoline-price spikes that ripped through a number of cities immediately after the disaster struck. The ugliness, however, is not to be found in the alleged price gouging but in the primitive reaction to what, by all accounts, was a simple lesson in supply and demand.
What happened in gasoline markets after the disaster is not hard to understand. A lot of Americans, shocked by the devastation that wracked New York and Washington, feared that the worst was yet to come and immediately went out to stock-up on groceries and gasoline. Press reports bear this out. Long lines began to form at some stations across the nation.
Now, there's only so much fuel at a service station. Whether you like it or not, there's only two ways to ration gasoline under such circumstances: by price or by, well, queuing up. After hearing from their distributors that oil companies couldn't guarantee when the next shipment of gasoline might arrive, some service stations likewise panicked and chose the former option. Others chose the latter.
The mob and the politicians and reporters that earn a living by feeding it would have us believe that the gas stations that stuck to the old prices and pumped until they dropped were "the good guys" while the stations that jacked prices were the blood-sucking profiteers.
But let's examine for a moment the consequences of sparing motorists the price hike. With demand skyrocketing, you get gasoline if you're lucky enough to be first or second in line and risk not getting any if you find yourself a few blocks back in the queue. People who don't really need the gasoline on Tuesday are given no reason to step aside for the motorist whose tank is running on empty. The result: a mini-replay of the wonderfully humane policies of the 1970s.
Now let's examine what happens when service-station owners try to maximize their profits. Aunt Edna, whose tank is half-full, sees $5.00 a gallon prices and thinks twice about filling up today. Uncle Fred, who's running on fumes, has a better chance of getting to the pump before he runs out of gasoline because the Aunt Ednas of the world aren't there to clog up the service station with panic buying.
This, dear readers, is a perfect example of what Adam Smith termed "the invisible hand" of the market, which permits individuals to pursue their self-interest in such a way as to advance the interests of society as a whole. And the reason, by the way, that there are soaring skyscrapers and concentrated wealth in Manhattan for terrorists to target in the first place is that we allow the invisible hand of the market — and not the all-too-visible political boot of government — to order our economic affairs.
Of course, politicians found time out of their busy schedules last week to scream bloody murder about the alleged profiteering that was going on and — what do you know? — prices quickly came back to earth. Many concluded, of course, that the hot spotlight of righteous indignation focused on those unconscionable prices was what stopped the gouging in its tracks. The reality is that the gas-buying panic in the heartland subsided about as quickly as it arose, causing demand to crash and prices along with it.
Sen. Jeff Bingaman (D., NM), chairman of the Senate Energy Committee, promised the usual political witch-hunt to punish the "profiteers." But the ugly political ploy of whooping up the mob has got to stop. Panic, not price-gouging, was to blame.
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09/14/01: Excoriator
Posted by: grundle2600@hotmail.com (grundle)
Price controls on food have a history of leading to shortages, famine, and starvation. It's mentioned in one of the articles that I posted above, but if you want, you can do a search at google to read about many other such examples described by many different people. And almost any standard economics textbook will also verify that. Througout history, in many countries, price controls have been responsible for many famines, and the starvation of huge numbers of people.
Liberals' support for price controls is an example of liberal theory vs. real world experience. The liberals have good intentions, so that's all that matters to them. The fact that their price controls result in shortages is of no concern to them. After all, their intentions were good, and that's all that matters.
The only moral issue here is letting each person make a choice. If price controls prevent me form spending my money on somehting that I want, then the government has taken away my right to live my life as I please. The governemnt is preventing me from getting what I need.
Firemen are under contract before a disaster takes place, so they can't raise their prices all of a sudden. That's one reason why we have things called contracts.
Your post sure had a lot of emotion in it, but you didn't give any logical reason or real world evidence to support price controls on food. If you would just do a little research and read about the consequences of such policies, you'd see that there is plenty of real world evidence to prove that price controls on food lead to hunger and starvation.
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09/14/01: Heroin_Girl
Posted by: grundle2600@hotmail.com (grundle)
That was a very well reasoned post.
You are correct that there was no shortage of gas. However, because of the panicked customers at certain specific gas stations, there was a very brief, temporary shortage at those *particular* gas stations.
Again, to repeat what I said in my above post:
"When I first heard that people were paying $5 a gallon for gas a few days ago, I knew that this would be a very, very temporary thing, because there was no interruption in the supply of gas. People were falsely worried about there not being enough gas. These people panicked because they don't understand economics."
I think that you and I are pretty much in agreement on this.
Thank you very much for your understanding of the examples of the lumber and the generator.
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