September 14, 2008

THREE CHEERS FOR PRICE GOUGING

I admit that everything I know about economics I learned from Thomas Sowell, but this morning I feel like I know more than some folks on TV. I want to throw stuff at the screen when they start talking about gas price gouging. I just actually heard someone say, "The oil companies are making a profit and it needs to stop." Oh puh-lease. This can't be considered serious commentary.

Here's some basic economics:

What all this boils down to is that prices higher than what observers are used to are called "gouging." In other words, prices under normal conditions are supposed to prevail under abnormal conditions. This completely misunderstands the role of prices.

Why do prices exist at all? To cause things to be produced and made available to the public -- and to cause consumers to limit how much they consume. Why then do prices suddenly shoot up? Because there is either less of a supply available or more of a demand, or both.

And here's more, worded differently:

Prices are not just arbitrary numbers plucked out of the air. Nor are the price levels that you happen to be used to any more special or "fair" than other prices that are higher or lower.

What do prices do? They not only allow sellers to recover their costs, they force buyers to restrict how much they demand. More generally, prices cause goods and the resources that produce goods to flow in one direction through the economy rather than in a different direction.

Plus a breakdown of why price gouging is necessary and helpful:

One hotel whose rooms normally cost $40 a night now charged $109 a night and another hotel whose rooms likewise normally cost $40 a night now charged $160 a night.
[...]
What if prices were frozen where they were before all this happened?

Those who got to the hotel first would fill up the rooms and those who got there later would be out of luck -- and perhaps out of doors or out of the community. At higher prices, a family that might have rented one room for the parents and another for the children will now double up in just one room because of the "exorbitant" prices. That leaves another room for someone else.

Someone whose home was damaged, but not destroyed, may decide to stay home and make do in less than ideal conditions, rather than pay the higher prices at the local hotel. That too will leave another room for someone whose home was damaged worse or destroyed.

In short, the new prices make as much economic sense under the new conditions as the old prices made under the old conditions.

Too bad few people on TV have any sort of economic sense.

So people who don't need to gas up their cars this week will wait for next week, leaving the gas for people who really need it right now. Duh, that's how the market works during a crisis. And gas station owners will have to replenish their pumps with more expensive gas, so they have to adjust now.

Really, if I can understand it, it ain't that complicated.

Posted by: Sarah at 06:42 AM | Comments (1) | Add Comment
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1 I live in an area the storm was first predicted to impact. We had planned to leave on a trip to San Antonio and Austin and the Texas Hill country on last Thursday in any case. We have a travel trailer and needed to get away for a while. The rest of my family who live here weren't planning to leave but evacuated to San Antonio. We heard on the radio when we got there that outlying motels were full but that downtown were not PLUS if you were an evacuee be sure to let them know as they were GIVING DISCOUNTS to evacuees. Not price gouging, but helping. Good old American spirit of helping. We didn't even get any rain until just now. (Sunday evening) I hope we get a lot as we really need it! My daughter in Louisiana had Gustave's eye pass directly over her house and got gales and a whole lot of rain from this Ike. They had no real damage, a few trees down by Bayou Teche which they live by.

Posted by: Ruth H at September 14, 2008 03:02 PM (hBAQy)

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