October 21, 2008

PRICE GOUGING

There's a story going on here in town that I simply do not understand. I thought maybe you could help me see what I'm missing.

A gas station owner has been fined $5000 for price gouging during hurricane season last month, when all the gas jumped. Most gas in town went to around $4.00, but apparently this guy was charging $5.50. And apparently he was the only one who raised his this high.

I don't see why this is illegal.

Gas is the most advertised commodity we buy. Ask anyone to tell you the price of milk or detergent, and I bet few people could do it. But everyone knows what gas costs. It's advertised on every street corner. If someone sold gas that day for $5.50, I would've had so much sticker shock that I would've kept going to the next gas station. Problem solved. If I did buy it there, well, I'm a sucker if it was $1.50 cheaper down the street.

But here's what I don't get. Let's say I own a store. I decide I want to sell a two-liter of Pepsi for $45. Is that illegal? It's stupid, but is it illegal? Is it price gouging? Is it only price gouging if there's a natural disaster?

I don't understand why this gas station owner couldn't set the price of gas at whatever he felt like. Is it because other gas stations would see his price and raise theirs? I know gas stations have price wars. Is there some regulating body that decides a price range for gas on any given day?

I really don't get this. What am I missing?

Posted by Sarah at October 21, 2008 06:10 PM | TrackBack
Comments

I don't know where you live. I'll say that here in Houston (aka ground zero for Hurricane Ike) that many gas stations only had enough gas for a few hours during the day, and many couldn't reopen either because of power, lack of gas in Houston, or some other hurricane related problem. Gas, when evacuating and in a distaster area is essential. Water and food as well. If I were evacuating and needed gas but had to pay $6/gallon for it because said gas station was on an evac route, I'd be pissed. With as long as it takes to get out of town during an evacuation and as overly populated as the roads are, going to the next gas station sometimes isn't an option. Many times they close so quickly that you don't know when the next opportunity will present itself. I am a firm believer in supply and demand, and market value of commodities. However, during an emergency situation essential items like food, water, gas, ice should be regulated. Otherwise we'd be paying $50 for a bag of ice, and much more than $5.50 for a gallon of gas. Yes, there is a regulating body during these crises: the national government. On a day to day basis in non-emergencies, the international market in combination with OPEC. Or at least that's what I was taught.

Posted by: Sara at October 21, 2008 06:44 PM

Sara, I absolutely disagree with you on this. Read Thomas Sowell's writings on price "gouging", starting here. The government should never regulate these things; the market should. And the market does...that's why prices go up.

My city was nowhere near an evacuation route. There was only one gas station that raised its prices like this.

Posted by: Sarah at October 21, 2008 07:05 PM

If you believe in the invisible hand in all absoluteness, then I think you're living in the wrong era. That ship has sailed long ago. Agree with it or not, but the government has had it's hand in the economy for a while now. I surely hope you never have to evacuate, because I believe you'd be in for quite a surprise. Perhaps you have before and you were the only person who didn't complain over the situation. And normally there are only one or two gas stations that raise their prices like that. But you truely think that in emergency situations the government should do nothing to aide people? I guess I am getting the impression from you that any government institution that helps people in crisis situations is unnecessary and frivilous. Or the government both state and national. Am I misjudging you? And I'm not trying to be rude either, so I apologize if my tone is condecending or rude.

Posted by: Sara at October 21, 2008 07:25 PM

Ok I just finished reading the article and his definitions of supply and demand make me say "well duh" and that's why I basically said above that crisis situation warrants a different economy. Again, if FEMA had used their PODs to charge people for MREs, water, and ice then people would have been paying far higher a price than normal. I guess where our difference lies is that I believe emergencies demand help and damn the free hand of the market! Sowell's example of the hotels is a mute point; if all the hotels started charging that price then that's not price gouging. Normally, price gouging would be when all the hotels remain around the same price, say a $10-20/night increase, but one decides their rooms are worth $109 or $200 or however much. Its not just an idea of things being in high demand and shorter supply. Its the total extreme of that theory, in my opinion. When you have neccessary commodities such as food, rooms,and gas there is INFINITE demand and short supply. We'd see localized hyperinflation. That's why I believe in government regulation in emergency situations; they're anomolies to the day to day laws of economic supply and demand.

Posted by: Sara at October 21, 2008 07:34 PM

Sarah, I see what you're saying but the government "steps in" for that because of the necessity of the item in a crisis.

In '04 when the hurricanes were kickin' our butts in Florida, we couldn't get gas, wood, water, well - you get the idea.

Folks were buying wood in Georgia, TN, Hell, anywhere, bringin' it down and sellin' it at 4x or 5x (or more) the norm. We'd just had a 'cane and another on the way, and all we could DO was pay that price.

Yes, it's a free market, but you should NOT be allowed to capitalize on the misfortune of ANYONE. That's not capitalism. That is just flat out robbery.

I'm not explaining this right, and I know it. It's so much easier to say it than write it....

Posted by: Tammi at October 21, 2008 11:57 PM

Tammi -- But that is the whole point of supply and demand. If it hadn't been worth their while, those people wouldn't have brought you wood and you would've had NO wood instead of EXPENSIVE wood. The people who were selling that wood, they were spending their own time and gas money to get it down there to sell it. They deserved to make a profit, and they were providing a good that people in the area needed and wouldn't have had if someone hadn't brought it down. That's how the market works in this situation. There's no way a guy would drive from TN to sell wood at the regular non-hurricane price. So y'all woulda been woodless.

OK, but no one is talking about this specific story that I specifically blogged about. Why did ONE gas station raise their prices and have to be punished? Is there a price you're not legally allowed to sell goods at? And why?

And for god's sake, we were NOWHERE near a hurricane. We just felt the effects of the entire nation raising prices. There was no evacuation, no shortage, no frantic run on gas.

Posted by: Sarah at October 22, 2008 07:54 AM

Sara -- Um, that article was specifically written about a crisis situation during a hurricane. Did we even read the same thing? I better check the link.

I find this comments section kinda funny, because I am used to arguing over my opinion and stuff, but this is actual economic fact. When there is more demand for things, as when people need to stock up, and the supply is low or dwindles, prices go up. And until someone else provides more supply or the crisis abates, prices are high.

If the government steps in and forces some guy to sell wood at non-crisis prices, he may as well evacuate with the masses instead of sticking around to provide that wood. It's not worth his time and effort. And no one will drive down from TN to do it either. The government will only succeed in screwing up the system if they force people to sell their goods at artificially deflated prices because of some theory of "niceness."

And "the invisible hand" is not something that can get outdated. Economics doesn't change based on what year it is.

Posted by: Sarah at October 22, 2008 08:02 AM

I'm not going to say the same thing over and over again. Yes, we did read the same article and he wrote about such general economic theories that I found most of it written for those who understand only the very basics of supply and demand. I felt he didn't introduce an original argument, and I disagree with his "opinion" of what price gouging is.

I have no idea why one gas station would raise their prices like that. If its non-emergency then I can concede I agree with you. Price gouging doesn't exist without limited supply and high demand, in my opinion. That gas station probably lost money in the long run because I'd assume most people, unless on the very last drop of gas, probably kept driving. I don't understand how that could be illegal when his likely decrease in profit was punishment enough.

And you're wrong about economics not changing with the year. Where did you study economics? Since economics is always theory, though based in math, people are always trying to improve on it. The invisible hand by itself with no government intervention is part of the 1700's-1800's. During the 1900's you see government putting its hand in economics a bit more, specifically come the 1930' and 40's. It all depends on what kind of market the economists are referring to, domestic policies or international, or definitely developmental economics. In fact, developmental economics changes a lot by each decade and affects our way of thinking about our own domestic policies. It is ridiculous to me that someone would say that the government doesn't have a hand in economics, because if you take the invisible hand theory word by word, that's its whole basis: absolutely no government intervention and I can promise you we've progressed past that. Look up the definitions of market failures and you'll see why. That doesn't mean the invisible hand doesn't still play a part in our economics today, just not in the way smith had intended when he wrote the wealth of nations.

Posted by: Sara at October 22, 2008 08:44 AM

I never said the govt *doesn't* have a hand in economics; I say it *shouldn't.* Big difference. Yes, the govt has started intervening more and more over the last century and now it has its hands in everything. I think that's a bad thing. I also don't think it changes the basic fundamentals of economic theory. It just changes which application is in vogue and puts more variables in the system.

This was never meant to be a discussion of what should happen to prices during an emergency. But it is now, and we're not going to agree on that issue. But thanks for the second paragraph addressing this specific example. I don't understand why this gas station is being fined, if, and you assume like I do, they probably lost money in the long run.

Posted by: Sarah at October 22, 2008 09:04 AM

I can understand capping prices (though at higher than normal rates) on necessities (only) during a crisis. But I definitely agree with Sarah on the gas station in her town; the guy's profit loss should probably be punishment enough, and incentive enough for him to lower the price as soon as he realized he was losing all his customers to the competition.

I also agree with Sarah on the economics thing. We may have "progressed past that" in that the government now does have a hand in virtually everything, but that doesn't mean that that kind of "progress" is necessarily a good thing.

Sure economics is always theory, but I tend to think that there is some kind of objective truth to it. Like physics and the law of gravity, I believe there is, to at least some extent, a basic law of incentives and supply-demand that is unchanging, no matter what year it is. These rules are based upon the values of the people that the market is made up of (see the rise of "green jobs" and "eco-friendly" products in the last few years), but the basic underlying law is still there.

I, and many other people, still believe that "regressing" to a basic free market - utilizing the law of supply and demand, and various incentives to increase productivity (and not those that increase laziness, as long-term welfare and other such entitlements do) would be a good thing, whether or not it's been done before, even 200-300 years ago. Just because something is "old" does not necessarily mean that it's "bad".

I will grant you that there needs to be some regulation - minor amounts of regulation - in order to ensure that people and companies are not breaking the law, but other than that, I think that the country - and elsewhere - would see tremendous growth. A lower rate of taxation on businesses would also contribute to (a) many new businesses, and (b) the growth and expansion of current businesses, leading to greater productivity, increased employment, etc., and even at a low tax rate, would likely eventually lead to increased tax revenue over time.

Posted by: Emily at October 22, 2008 04:03 PM

So I never really comment on the wife's blog out of principle. The most ignorant tripe every written is usually done in blog comments section so I try to avoid it. This one isn't so bad so I will put my two cents in since I have some academic background in the subject.

During an emergency, like a hurricane, the supply of basic necessities like water, food and medicine will be cutoff temporarily. No trucks coming in due to all the damage to roads, downed power lines etc. So the honest person that cares about their community/humanity should want two things:

1. The available supply of goods should be used sparingly. We use just enough so everybody can have some.

2. People should be working overtime to get those needed goods to the disaster areas as fast as possible.

The quickest way for both of these things to happen is to have ridiculous high prices on the small amount that is available. If the local gas station had only 20 5 gallon jugs of water left, and they were still charging $1, I might be tempted to buy all of it to store in my basement for my family. Do I need all 20? Probably not but I might just fill my trunk just in case.

What would happen to the poor sap who came in behind me and gets no water? Sucks to be him. We could have the police/militia groups roam hurricane areas sack beating people filling their trunks with all the water...or we could let the poor bastard who runs the gas station charge me $100 a gallon and I sure as hell won't buy all 20 jugs of water. I'll probably just get one or two which would keep me, the wife and dog alive for a few days until essential services are restored.

That $100 a gallon price will definitely motivate the Culligan man two counties north who still has plenty of water. He'll pay overtime to every driver he has to ship that water as fast as he can. He'll make a buck but the supply of water will get to the people who desperately need it.

This is, as the lovely wife says, basic economics. Prices are signals. They can signal people to conserve as well as signal suppliers to provide. In reality, populist minded hoople heads are likely to burn down the gas station who was smart enough to make a buck AND ensure that his product was fairly distributed during a time of crisis. He would be a hero but he'd probably get beaten like Reginald Denny. In this specific example, the capitalist is the storyís hero. We could try to enforce fairness but Stalin, Pol Pot and Mao tried that and said it didnít work out so well.

Posted by: The Husband at October 22, 2008 04:51 PM

^^^and this makes sense to me as well.

I suppose that if a vendor raised the price of a product to such an extent that no one would/could buy it, then (a) people would go elsewhere to look for it, and (b) said vendor would not benefit from setting the price so high, and thereby, if he/she is reasonable, will lower it until people would/could pay for it.

Posted by: Emily at October 22, 2008 06:42 PM

I can't say I have a problem with price-gouging during emergencies regulations. Say you lived in Galveston and Hurricane Ike is headed your way, but for whatever reason you don't have sufficient funds to buy enough gas at $5.50/gallon to get you out of harm's way. Are you just supposed to stay where you are and risk death? I have no problem with limiting purchase amounts (like the gallons of water issue: many times I have see retailers have sales with the caveat of "Limit X per customer"). For some in that situation - not being able to afford the price - that could be a death sentence. There were those foolish enough to stay behind, regardless of their ability to leave, and they have yet to be found, or their bodies were discovered in flatten homes.

Posted by: Miss Ladybug at October 22, 2008 09:08 PM