In Praise of Price Gouging by Dr. Ron Paul

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In Praise of Price Gouging

As the northeastern United States continues to recover from Hurricane Sandy, we hear the usual outcry against individuals and companies who dare to charge market prices for goods such as gasoline. The normal market response of rising prices in the wake of a natural disaster and resulting supply disruptions is redefined as “price gouging.” The government claims that price gouging is the charging of ruinous or exploitative prices for goods in short supply in the wake of a disaster and is a heinous crime But does this reflect economic reality, or merely political posturing to capitalize on raw emotions?

In the wake of Hurricane Sandy, the supply of gasoline was greatly disrupted. Many gas stations were unable to pump gas due to a lack of electricity, thus greatly reducing the supply. At the same time demand for gasoline spiked due to the widespread use of generators. Because gas stations were forbidden from raising their prices to meet the increased demand, miles-long lines developed and stations were forced to start limiting the amount of gasoline that individuals could purchase. New Jersey gas stations began to look like Soviet grocery stores.

Had gas stations been allowed to raise their prices to reflect the increased demand for gasoline, only those most in need of gasoline would have purchased gas, while everyone would have economized on their existing supply. But because prices remained lower than they should have been, no one sought to conserve gas. Low prices signaled that gas was in abundant supply, while reality was exactly the opposite, and only those fortunate enough to be at the front of gas lines were able to purchase gas before it sold out. Not surprisingly, a thriving black market developed, with gas offered for up to $20 per gallon.

With price controls in effect, supply shortages were exacerbated. If prices had been allowed to increase to market levels, the profit opportunity would have brought in new supplies from outside the region. As supplies increased, prices gradually would have decreased as supply and demand returned to equilibrium. But with price controls in effect, what company would want to deal with the hassle of shipping gas to a disaster-stricken area with downed power lines and flooded highways when the same profit could be made elsewhere? So instead of gas shipments flooding into the disaster zones, what little gas supply is left is rapidly sold and consumed.

Governments fail to understand that prices are not just random numbers. Prices perform an important role in providing information, coordinating supply and demand, and enabling economic calculation. When government interferes with the price mechanism, economic calamity ensues. Price controls on gasoline led to the infamous gas lines of the 1970s, yet politicians today repeat those same failed mistakes. Instituting price caps at a below-market price will always lead to shortages. No act of any legislature can reverse the laws of supply and demand.

History shows us that the quickest path to economic recovery is to abolish all price controls. If governments really want to aid recovery, they would abolish their “price-gouging” legislation and allow the free market to function.

link

http://paul.house.gov/index.php?option=com_content&view=article&id=2023:in-praise-of-price-gouging&catid=64:2012-texas-straight-talk&Itemid=69

LysanderSpooner's picture
LysanderSpooner
Joined:
Jul. 31, 2007 4:01 pm

Comments

What is lacking here is an acknowledgement that money feels no suffering. People can and do.

What I am about to say may shock some people, but if price gouging by gas suppliers, at any time including emergencies, is made illegal it would create a great inconsistency in how the law is applied to businesses. For example, take a fancy sweater sold at a local equivalent at "K-Mart" and a similar one at "Macy's." While the similar yet only slightly different sweaters are of the same quality, it is very, very likely that the one sold at "Macy's" could cost more. Why? Because the shoppers at Macy's would be expecting the price to be higher and would be much more able and willing to pay it. This is an example of "price gouging" because virtually the same item can be sold at different places, with one being higher in price because the people who would buy it expect the price to be high.

So, LysanderSpooner, you have a point. If "price gouging" is made illegal when it comes to gas, even in times of emergency, it would create an awkward law to enforce, because in times of peace and tranquility "price gouging" goes on all the time.

micahjr34
Joined:
Feb. 7, 2011 4:57 pm

LysanderSpooner...

If you are so convinced that you and Mr. Paul have the answer, then here's a proposition.

Since Libertarianism has never had a successful model anywhere in the world (accept Somalia perhaps) why doesn't Mr. Paul take the remaining money he has in his campaign fund, get the Libertarian candidate Gary Johnson to throw in his remaining money; and maybe a few other supporters' funding; go to west Texas, New Mexico or some other area and buy a town.

Once they buy the town, have their followers populate the town and area and set up a Libertarian community and prove to all that their theories actually are workable.

How about that?

What do you think?

Up for the challenge?

Prove your economic and political theories in real time, real life.

delete jan in iowa
Joined:
Feb. 6, 2011 12:16 pm

The demand for gasoline didn't "spike". Nobody could drive their cars. The demand actually dropped significantly. It was the need for smaller amount of gasoline all at the same time that spiked. Hundreds of people standing in line with a 5 gallon can to be filled. That was the problem, not a super demand for gasoline.

Bush_Wacker's picture
Bush_Wacker
Joined:
Jun. 25, 2011 7:53 am
Quote jan in iowa:

LysanderSpooner...

If you are so convinced that you and Mr. Paul have the answer, then here's a proposition.

Since Libertarianism has never had a successful model anywhere in the world (accept Somalia perhaps) why doesn't Mr. Paul take the remaining money he has in his campaign fund, get the Libertarian candidate Gary Johnson to throw in his remaining money; and maybe a few other supporters' funding; go to west Texas, New Mexico or some other area and buy a town.

Once they buy the town, have their followers populate the town and area and set up a Libertarian community and prove to all that their theories actually are workable.

How about that?

What do you think?

Up for the challenge?

Prove your economic and political theories in real time, real life.

The Free State Project is trying to such a thing. The problem with what you are proposing libertarians do is that the State and Federal governments will interfere. If you are living in a town that is still governed by outside governments, how is there any way to demonstrate if the experiment is a success?

LysanderSpooner's picture
LysanderSpooner
Joined:
Jul. 31, 2007 4:01 pm

Just little details that can be overcome if you really want to do the project.

You could do it like a documentary, have an objective outside person film it or just have everything in the town on video. People would be interested to see it in action; or if it failed you all would learn a valuable lesson.

Either way, everyone learns something.

Had to google to find the website.... may want to check your link, it didn't work right.

New Hampshire.... is that where it will be?

delete jan in iowa
Joined:
Feb. 6, 2011 12:16 pm

Lysander, you are giving the typical reason why government should not place price controls on products.

This arguement does not apply in such an emergency crisis.

The idea of 'price gouging' is that the price is higher than the cost to deliver the gasoline - including the normal profit of the owner. The idea is that firms take advantage of the circumstances and so 'gouge' the customer. This is what is illegal. This is different than what the price would be set in a competitive market - competition makes the price just equal to what it takes for the owner to offer gas and to pay his salary. So, if suddenly supply is fixed, the price rises to whatever demand will bear, and the owner makes pure profit - above and beyond what it takes to bring in more gas.

Of course, the government cannot hope to know what all the prices of all the products should be, and so focuses on the necessities and those items which are necessary to get people out of the emergency.

You should take a economics class sometime. The education you are getting from the CATO institute is rotting your brain.

Dr. Econ's picture
Dr. Econ
Joined:
Jul. 31, 2007 4:01 pm

I do not accept the morality or logical reality of price gouging, but I do accept it as a reality that will always exist, whether I like it or not. Like I said earlier, even in times of peace and tranquility people are being price gouged simply because of where and when they choose to do their shopping.

Dear Higher Power,

Please help me change what I can,

Please help me cope with what I can't change,

Please give me the wisdom to tell the difference between the two.

micahjr34
Joined:
Feb. 7, 2011 4:57 pm

They could try in Somalia, Afghanistan, Brazil, Belize, Costa Rica, etc. There are many relatively open, free areas. Free State Project wants to suck on the teat of US security, stability and contract law without paying for it.

Phaedrus76's picture
Phaedrus76
Joined:
Sep. 14, 2010 8:21 pm

Probably the best way to handle the shortage of a product is through rationing....it limits the demand to the supply on hand. Prices remain stable.

While a black market will develop, everyone has an original equal access to the supply on hand.Some will sell their ration on a black market. Others will simply use their own rationed amount.

The original retail price, however, remains stable.

Retired Monk - "Ideology is a disease"

polycarp2
Joined:
Jul. 31, 2007 4:01 pm
With price controls in effect, supply shortages were exacerbated. If prices had been allowed to increase to market levels, the profit opportunity would have brought in new supplies from outside the region.
Blah blah... market fanatics always frame whatever the market does as inherently desirable. But that's not the issue. Higher profits may work to bring in more supply EVENTUALLY. Why should some gas station owners be allowed to extort the public in the mean time? There's no mechanism for all this unearned profit to be invested in bringing in more supply. The gas station owners are free to keep it. Perhaps the best of both worlds is quantity rationing AND some price rationing... allowing a small rise in price to bring in more supplies to the market. You can have your 10 gallons of gas... and you better find a way for it to last... and it will cost you 10% more. To let prices rise without limit only allows the rich, who don't care about the high price, to waste a scarce resource. But then it comes as no surprise that market fanatics seem to also be in the lapdogs of the rich.

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Pierpont
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