Topic: Economics
Price Spikes, Hikes, and Hurricane Ike Anti-price gauging hurts disaster recovery and makes bad situations worse.by Billy Joe
(libertarian)
Saturday, September 13, 2008
Cries of "price gouging" follow fuel price increases as surely as flooding follows a hurricane. The fact that fuel is in more limited supply doesn't ever seem to be taken into account. The wholesale supply disruptions are not taken into account. The inventory replacement costs of the service stations are not considered.
No matter what people say, they just don't seem to understand the law of supply and demand. Why is it surprising to learn that a policy of privatizing profits and socializing risks in the mortgage market caused an over supply of houses and the corresponding drop in home values? Why is it surprising that a policy of privatizing risks and socializing profits in the oil industry has doubled fuel prices and left us more dependent on imports?
Economists take it as a given that price controls cause shortages and subsidies cause malinvestment. The public and policy makers don't want to accept that. Fuel prices are no different. Most of us are too young to remember the long lines and fuel shortages brought about by Nixon's price controls in the 1970s, but post-disaster price controls are worse because that is the time when fuel is the most precious and needs to be conserved the most.
After a hurricane or other calamity, people need fuel to run generators and bring aid to those in trouble. The best (most effective and efficient) way to insure fuel is not wasted is to raise its price. If prices are not allowed to rise to their new higher market value, then fewer suppliers will be willing to provide their services in disaster-prone areas and even more shortages will result.
Are those with less ability or desire to pay discriminated against? No. Those people would have no fuel anyway if the suppliers weren't there in the first place. Nobody opens a gas station with the intention of providing fuel at artificially low prices and no profit. It makes no sense for someone to voluntarily live in a hurricane zone and then complain that they are not sufficiently protected from one of the consequences of their own actions. If you don't want to pay the high prices, stock up ahead of time or live someplace else.
Walter Williams, professor of economics at George Mason University, writes:
Say you owned a small 10-pound inventory of coffee that you purchased for $3 a pound. Each week you’d sell me a pound for $3.25. Suppose a freeze in Brazil destroyed half of its coffee crop, causing the world price of coffee to immediately rise to $5 a pound. You still have coffee that you purchased before the jump in prices. When I stop by to buy another pound of coffee from you, how much will you charge me? I’m betting that you’re going to charge me at least $5 a pound. Why? Because that’s today’s cost to replace your inventory.
Historical costs do not determine prices; what economists call opportunity costs do. Of course, you'd have every right not to be a "price-gouger" and continue to charge me $3.25 a pound. I'd buy your entire inventory and sell it at today's price of $5 a pound and make a killing.
If you were really enthusiastic about not being a "price-gouger," I'd have another proposition. You might own a house that you purchased for $55,000 in 1960 that you put on the market for a half-million dollars. I'd simply accuse you of price-gouging and demand that you sell me the house for what you paid for it, maybe adding on a bit for inflation since 1960. I'm betting you'd say, "Williams, if I sold you my house for what I paid for it in 1960, how will I be able to pay today's prices for a house to live in?"
Why should government employees drawing saliries and overtime be materially compensated for their effort and physical risk when helping disaster victims and entrepenuers not be compensated for thier effort and financial risk when providing goods and services to those same victims? If gast station owners and other businessment are not allowed to help disaster victims for profit, they are less likely do so at all, and the entire burden of disaster recovery will be on the volunteers and the government. Increasing the burden of disaster recovery personnel is a self-evidently bad way to aid in hurricane relief.
Even if we assume—for the sake of argument—that the law of supply and demand ceases to exists during hurricanes, we would have to look at the long term effect of such socialized aid. Anything that reduces the consequences of living in disaster-prone areas, things such as national flood insurance, encourages more people to live there and guarantees that the next hurricane will produce more victims. It is common sense that protecting people from the consequences of their unwise actions will produce more unwise behavior in the future. When the rest of the tax payers, people who chose not to live in a hurricane zone, have to mitigate the costs imposed by those who chose less wisely, it makes a bad situation worse, not better.
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I understand the principle, but do you have any evidence that price gouging is going on with Gustav or Ike? Most likely, there are just shortages. After Katrina, they had the opposite problem--too many supplies of the wrong stuff! Clothes and food were dumped in parking lots because churches collected them and shipped them to the region when there were no stores open to take them. They had "glut".
I have family members who are Red Cross volunteers. They do get some pay for time and travel. But they are compensated below market rates because of their strong desire to help.
I thought it was admirable that New Orleans safety workers were compensated ahead of time for the anticipated emergency in Gustav. With their families safe, they were more available to help the general public.
Likewise the futures markets anticipate shortages and demand. By guaranteeing a contract to deliver a quantity in the future, even at a higher price, the producer is more motivated to make that investment.
I like your bringing attention to the issue, but I would have liked more links to specific examples of gouging after a disaster.
"do you have any evidence that price gouging is going on with Gustav or Ike? "
That would depend on your definition of "price gauging." Obviously prices have gone up nationwide in the last 24 hours but, as I explained, that is exected and even desireable.
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