“Price gouging” is a non-concept

Lynne Kiesling

Mr. Coyote has a post from last week (complete with good links) on that mythical economic concept: price gouging.

There are two ways this can play out: 1) a short term spike in prices, as much as a dollar or more a gallon or 2) long and irritating gas lines. Lets hope that prices are allowed to reach their level and gas lines can be avoided, but who knows what political stupidities (ala Hawaii) will be proposed.

I really, really hate gas lines. I hate the uncertainty of whether or not I can find a station open. I hate refilling my tank every day to make sure I am not caught short. And for those of you who say I am arrogant since I can afford higher prices but the poor cannot, I assure you that folks who are paid by the hour are hurt much worse waiting around for hours in gas lines than the mere irritation I encounter.

And just when I was about to indulge in a full-on rant about how price gouging is an economic non-concept, I find this Iain Murray article in today’s Tech Central Station.

Rather than “gouging” members of the public, gas station owners are actually helping them by raising prices. This may seem counter-intuitive, but we have to consider how supply, demand and price interact. Normally, supply and demand dictate price, as is the case when gas prices spike. When price, however, is fixed, as would be the case if an “anti-gouging” law was in effect, then demand will outstrip the supply available. Shortage is the inevitable result. Gas would be rationed in some way, whether it is by some arbitrary legal fiat or by long lines at the pump. A black market is also more likely.

Moreover, as experience with rent control has shown, capping prices in times of scarcity also has the perverse effect of reducing the quantity of the good or service supplied. In other words, capping gas prices would actually lead to less gas being sold, as suppliers reduce the amount they are willing to sell in order to avoid loss. Shortages are therefore exacerbated. By contrast, anyone who tries “gouging” will find themselves with unsold supply and will be forced to lower their prices to offload it.

Yep, what they said. But the thing that really grates on me about the phrase “price gouging” is the implicit underlying belief that companies have all the power and they can stick it to us. First of all, that belief completely ignores the fact that their supply conditions have changed, and they have to adapt to that change. Second of all, it removes any empowerment and responsibility from consumers, and treats us as helpless victims who cannot be expected to confront tradeoffs and make decisions about whether or not to buy less at that higher price. In other words, the “price gouging” rhetoric over-empowers companies and under-empowers consumers. That’s got victimization mentality written all over it.

And you know what my response is to victimization mentality: get over it.

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9 thoughts on ““Price gouging” is a non-concept

  1. Hi Lynne,
    Welcome back.
    Using the term “price gouging” does imply greed on the part of the refiners/big oil/small dealer (it’s a broad brush). But it could also imply a frustration with perceived sloth–couldn’t they have seen the risk and bought a forward contract to hedge that risk? Or did they buy a hedge and then still raise prices? Now that’s something that could get a lot of people mad.
    Cheers,
    Tyler

  2. I don’t see how a forward contract is going to prevent force majeure; if deliveries cannot be made, you’re going to have the same problem (and the same alternatives) regardless.

  3. Prices act as the steering wheel for the economy.

    They signal imbalances and shift resources. For example since there is a refinery shortage the higher gas prices shift profits to the existing refiners so they have the capital to mesh with their expertise to build new refineries.

    Last week when gas prices rose to some $3 to $4
    around the country that is exactly what happened.

    But while prices generally rose to the $3 to $4
    dollars a few station in Atlanta was reported to be charging around $4.89.

    Those few stations are not going to shift enough profits to the refiners to make a difference. Most likely they are paying the same price to their suppliers as all the other gas stations selling it for $3 to $4, so the profits probably will never leave their hands.

    So explain to me why those few individual stations were not price gouging.

    Price gouging is extremely rare, but that does not mean it does not exist.

  4. Spencer, I think it is incumbent upon you to define gouging for the rest of us, including the environments where your defintion does or does not apply. In other words, you should explain why a solitary high asking price in a market where there is no true scarcity, where there is obviously some price competition, and no real emergency IS gouging.

  5. Spencer, I think it is incumbent upon you to define gouging for the rest of us, including the environments where your defintion does or does not apply. In other words, you should explain why a solitary high asking price in a market where there is no true scarcity, where there is obviously some price competition, and no real emergency IS gouging.

  6. Mr. E-P said what I was going to say about financial forward contracts, capacity constraints, and natural disasters. Something like this is sufficiently in the right tail of the disaster distribution that a forward contract, even if feasible, would only be a partial buffer.

    Spencer: I’d go back by those stations that were charging $4.89 over the ensuing days, to see if they had to reduce their prices to make sales. The presence of competing retailers makes it even harder for retailers to maintain high prices.

  7. Mr. E-P said what I was going to say about financial forward contracts, capacity constraints, and natural disasters. Something like this is sufficiently in the right tail of the disaster distribution that a forward contract, even if feasible, would only be a partial buffer.

    Spencer: I’d go back by those stations that were charging $4.89 over the ensuing days, to see if they had to reduce their prices to make sales. The presence of competing retailers makes it even harder for retailers to maintain high prices.

  8. Just curious- what is going on in Hawaii since they instituted their price caps? There was a lot of talk about them in the run up, but I haven’t seen much since they were instituted. Are they accomplishing anything- good, bad, or indifferent?

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