Friday, November 2, 2012

Price Gouging

Yesterday I posted part of Jeffery Tucker's Storm Economics in One Lesson.

David Webb at Incendiary Insight posted why he thinks that price gouging is bad.

Let's look at why David Webb is wrong:

"Because trying to take advantage of a devastating situation by skyrocketing the prices of basic commodities makes it much, much more costly for people trying to survive and rebuild."

He seems to have forgotten the function of prices.  A price tells the supplier of goods and services how much of that product he should make and a price tells the consumer how many of that product he can afford.  David has forgotten this, and what happens if we try to set a price?

If the prices do not go up, then more people will not go out of their way, and into more difficult situations, in order to provide goods and services.

If the prices do no go up, then people may hoard various things, then the next people in line will have nothing.

This is known as a shortage.  Shortages happen whenever a products price is set below market value.

Here's an example: say the price of a new Ferrari is set at $100.  How many will you buy? The correct answer is as many as you can.  Then you can turn around and sell them for a huge profit at the actual market rate.

Fixing prices (or preventing price gouging) will result in the first people in line buying all of the supplies and then reselling them for the actual market rate, or hoarding the products for themselves.  There are not infinite supplies.  Not everyone can have everything.  By fixing prices you've decided that the first people in line will get the stuff and the next people may get nothing.

from Price Gouging Saves Lives in a Hurricane:
What would happen if prices were allowed to go up in defiance of the government?
Well, let's consider ice. Before [Hurricane] Charley hit, few in central Florida had stocked up on ice. It had looked like the storm was going to skirt our part of the state; on the day of landfall, however, it veered eastward, thwarting all the meteorological predictions. After Charley cut his swath through central Florida, hundreds of thousands of central Florida residents were unexpectedly deprived of electrical power and therefore of refrigeration. Hence the huge increase in demand for ice.
Let us postulate that a small Orlando drug store has ten bags of ice in stock that, prior to the storm, it had been selling for $4.39 a bag. Of this stock it could normally expect to sell one or two bags a day. In the wake of Hurricane Charley, however, ten local residents show up at the store over the course of a day to buy ice. Most want to buy more than one bag.
So what happens? If the price is kept at $4.39 a bag because the drugstore owner fears the wrath of State Attorney General Charlie Crist and the finger wagging of local news anchors, the first five people who want to buy ice might obtain the entire stock. The first person buys one bag, the second person buys four bags, the third buys two bags, the fourth buys two bags, and the fifth buys one bag. The last five people get no ice. Yet one or more of the last five applicants may need the ice more desperately than any of the first five.
But suppose the store owner is operating in an unhampered market. Realizing that many more people than usual will now demand ice, and also realizing that with supply lines temporarily severed it will be difficult or impossible to bring in new supplies of ice for at least several days, he resorts to the expedient of raising the price to, say, $15.39 a bag.
Now customers will act more economically with respect to the available supply. Now, the person who has $60 in his wallet, and who had been willing to pay $17 to buy four bags of ice, may be willing to pay for only one or two bags of ice (because he needs the balance of his ready cash for other immediate needs).
Some of the persons seeking ice may decide that they have a large enough reserve of canned food in their homes that they don't need to worry about preserving the one pound of ground beef in their freezer. They may forgo the purchase of ice altogether, even if they can "afford" it in the sense that they have $20 bills in their wallets. Meanwhile, the stragglers who in the first scenario lacked any opportunity to purchase ice will now be able to.
Note that even if the drug store owner guesses wrong about what the price of his ice should be, under this scenario vendors throughout central Florida would all be competing to find the right price to meet demand and maximize their profits. Thus, if the tenth person who shows up at the drugstore desperately needs ice and barely misses his chance to buy ice at the drugstore in our example, he still has a much better chance to obtain ice down the street at some other place that has a small reserve of ice.

Yes, its terrible that these people have suffered a huge storm.  Yes, its terrible that the prices for things will go up.  But without the market setting the prices, by using the government to set them you will be allocating goods and services based on who gets in line first rather than who needs it the most.

more from Price Gouging Saves Lives in a Hurricane:
Nobody knows the local circumstances and needs of buyers and sellers better than individual buyers and sellers themselves. When allowed to respond to real demand and real supply, prices and profits communicate the information and incentives that people require to meet their needs economically given all the relevant circumstances. There is no substitute for the market. And we should not be surprised that command-and-control intervention in the market cannot duplicate what economic actors accomplish on their own if allowed to act in accordance with their own self-interest and knowledge of their own case.
"Should businesses be allowed to raise prices on televisions and stereos? Absolutely, nobody needs them during a hurricane, but doubling the price of gas during a hurricane or tripling the price of a bottle of water during a black-out is foolish and cruel and should remain illegal."

Note that David Webb has determined that he knows which goods and services are "needed" by people in a storm.  How does he know which items are "needed" and which are not?  Is he a storm surviving expert?  Even if he is, has he determined what the prices should be for all goods and services?

He says televisions and stereos are not needed.  What about radios?  What about car batteries? What about shoes?  David, should doughnut sellers be able to raise the prices on doughnuts?  Who gave you the right to decide what goods and services are needed by storm survivors?

No one knows the wants, needs, and desires of the storm survivors better than they themselves.  No one knows the ability to provide the things to those people better than the people who are doing so.  Why would you want to get in the way of their decisions?

"Stossel is wrong for, once again, supporting the libertarian economic position instead of the common sense position, namely, charge a reasonable price while a disaster is happening. Don't exploit a crisis by overcharging for basic goods."

How nice of David Webb to put "common sense" ahead of ideology.  His ability to do that must be what gave him the right to decide on which goods price gouging is allowed and on which goods it is not.

He apparently does not realize that the libertarian economic position is what it is because that position is what serves people best.

If you want to decide that prices should not be increased after a storm, then why stop there?  Why not decide that food should always be set at low prices, so that the poor can have all that they need?

Why not decide that the price of a house should be cheap enough for everyone to be able to afford?

Why not decide that medical care is too important to be left for the market?  Aren't single payer healthcare systems the best?

more from Price Gouging Saves Lives in a Hurricane:
But we know all this already. We know that people lined up for gas in very long lines during the 1970s because the whole country was being treated as if it had been hit by a hurricane that was never going to go away. We also know that as soon as the price controls on gas were lifted, the long lines disappeared, as if a switch had been thrown restoring power to the whole economy.
"Price gouging" is nothing more than charging what the market will bear. If that's immoral, then all market adjustment to changing circumstances is "immoral," and markets per se are immoral. But that is not the case. And I don't think a store owner who makes money by satisfying the urgent needs of his customers is immoral either. It is called making a living. And, in the wake of Hurricane Charley, surviving.

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