Why Price Gouging is a Public Service
The Southeast is experiencing a temporary gas shortage due to last week's hurricane in the Gulf states. The effect has been long lines at the pumps, gas stations running out of gas, and a huge amount of anxiety for the residents of Georgia, Tennesee and the Carolinas.
Twitter is a-twitter with information about gasoline availabilities in the Atlanta area with messages like these:
"BP on Roswell Rd in Sandy Springs has gas, 40+ car line, cops and an ambulance present"
"Costco sandy springs is now out of gas"
"I was just told by phone Costco Dunwoody has gas. 90 mins wait. Members only"
"I'm searching for gas near cumberland mall or ponce and moreland or anywhere in between, Thanks!"
Bloggers have also related their experiences:
I have been looking all around for gas and I have already called my boss and told him that I might not be able to work tomorrow. I also might not get to see my daughter this weekend. Thanks Gov. Perdue! Your delayed reactions have costed you my vote. - Helpless
When this gas crisis first hit a week or so ago, I didn’t rush out and fill my tanks or engage in any of the so-called “panic” behavior. This past weekend, my small, rural hometown ran completely out of gas. Closest station with gas was 18 miles away. Luckily, I had some gas in a jug that I keep for my lawnmower. Lesson learned. Now, whenever I get below a half tank, I’m topping off. - LeeThe curious thing is that all of this waiting, panic, and anxiety is completely unnecessary if people could simply understand and accept the functioning of a free market. The market, however is not free in these states because the governments have imposed price gouging laws to prevent service stations from raising their prices when supplies are lower than normal. Indeed, in Georgia alone 1300 price gouging complaints have been filed and 130 service stations are under investigation.
Two hours, six gas stations, and two $25-fill-ups later, I have a full tank for the first time in two weeks. Now I understand why other people have been topping off every chance they get…. - concerned
Why does a shortage warrant raising of the prices??? I see where some stations are going to be investigated, but who is investigating why it is still over $4 a gallon?? - cin
The market solution is simple: allow service stations to charge whatever they want. Yes, allow them to "price gouge"! If they were allowed to do so, here's what would happen.
First, as soon as service stations learned that they would not be receiving the same frequency of gas shipments, they would immediately raise their prices. Each station's objective would be to reduce demand so that the supply they have remaining would last until their next shipment. They would also make more money per gallon, but given the shortage they will be selling less gas over the week too. And yes, it will maximize their profits.
When supply conditions change suddenly and unexpectedly the stations will not be sure what price to set. Ideally they would like to set a price such that the last gallon of gasoline in their storage tanks is sold just as the tanker truck arrives to fill them up again. But this will be difficult to do. A higher price will normally reduce demand, but by how much will be greatly uncertain. It will also depend on what the prices and supplies are among competing stations in the neighborhood. If other stations increase by more, one station may even see its demand increase despite a higher price. If this happens the station should respond by raising its price even more to moderate its sales. If demand falls too much they should adjust downward. The greater the uncertainty, the greater the volatility in the prices.
Some firms may overreact relative to their competitors. Maybe a station will raise its price to $8 a gallon. What to do about this? As the Beatles would sing: "Let it Be! Let it be-ee! Let it Be! Let it Be!" A station that greatly overprices will discover it has no demand, since there will be other stations open with cheaper gas. Eventually one of two things will happen. Either , this high priced station will recognize that a new gas shipment will soon arrive and to make any profit at all, will be forced to lower its price, perhaps below its competition for awhile. Or, this station will watch as those firms who underpriced run out of gasoline and people are forced to buy the $8 gas. If the latter happens this high priced station, and others like it, will be the ones that provide the greatest public service. That's because if shortages are that significant, these stations will be the ones that assure that there will always be a service station open and everyone will always be free to go in and buy as much as they like.
What's the effect for consumers. Well, undoubtedly they will pay more for gasoline and they won't be happy. But, the higher price will cause many of them to reduce their consumption. Especially in this case, because the supply disruption is expected to be temporary, those who don't absolutely need to fill up, won't. Those who only need a little gas, will fill up a little, also waiting for later when the price will go down. But the most important effect for consumers is that if the stations are allowed to raise their prices to whatever they want, then there will always be open gas stations and there will be no lines. For everyone with an unexpected emergency, for example a person with a parent that suddenly becomes ill across the state, they will at any moment, day or night, be able to find a station that's open and be able fill up their tank. With no lines consumers will not have to consider the what if question: namely what if there is no gas tomorrow or next week when I really need it?
Because of the lines and the closed stations, all the consumers in the southeast are asking that question today. And, because the market doesn't work right, they are responding by filling up their tanks every chance they get and filling up gas cans on top of that ... all of which makes the situation worse. They're behavior, which is perfectly rational and reasonable given the situation, causes stations to run out of gas, creates lines at every station that is open, and raises the anxiety and in some cases the panic among the population.
So, the solution to the chaos is simple. Eliminate the price gouging laws and leave the firms free to charge whatever they want. By doing so, the government and the service stations would be providing a public service; namely the elimination of wasteful gas lines and its associated anxiety.
2 comments:
I find discussions like this helpful because they open up some of the implicit assumptions of various transactions. With price gouging, as with the earlier example of workers who are horrified at losing their jobs of 30 years, I can see how one might say that consumers/workers are wrong to be outraged--that they misunderstood or chose to ignore the terms of the transaction: worker exchanges useful, money-generating work for money; a consumer exchanges money for goods, this is subject to change on both sides. Sometimes it goes a step further and it is said (or implied) that outraged workers and consumers seek to perpetuate a kind of injustice by insisting on things like limitations on how much the price of gas can be raised after a disaster or by imposing costs on companies when they lay people off/outsource.
What I would like to see is more discussion of the implicit, unstated terms of the transactions, because those are where much of the public sentiment (and therefore, pressure on public policy) is coming from. A worker who works for the same company for 20 years doesn't just work for the week to week paycheck (or whatever); she works each week under the impression her job will continue through the next week (month, year, decade). For all those who would decry such an assumption, it must be said that it was a reasonable, functional assumption for workers to make for decades. Most people took the implicit stability contract seriously on the worker side too: you've paid me consistently in the past, so I'll consistently work for you in the future. This is usually described as loyalty--a quaint virtue with an odor of inefficiency about it. I prefer to speak of stability rather than loyalty, because it helps prevent overly personalizing the issue, but loyalty is the term that has been used for the stability of the employer/worker relationship in the past.
There are other implicit terms in these arrangements, but I'll confine my musings to stability.
That there are numerous reasoned objections to the notion of loyalty or stability in these transactions doesn't change that there used to be some version of it operating in most contexts, and that it changed, and that the change is difficult for people to deal with, and that the implicit stability deal was broken without their consent. This last piece is what most often gets lost and that really should be taken more seriously.
Stability also operates as an implicit consumer assumption--the price has tended to stay the same, or has tended to change in a consistent way for 20 years, so I assume that I will continue to purchase the commodity in much the same way in the future (e.g., filling up my car that I will continue to drive). What really upsets people is when they continue to be stable (buying gas, showing up to work) and the businesses involved or the world commodity prices involved change, especially without warning.
This isn't to say anything can really be done about any of this, but I don't think the debate around the employment climate can be constructive if the implicit stability contract, and its abrupt cancellation by one side despite mass objections from the other, is not named.
There is a very difficult combination of shame, anger, loss, and horror that many are experiencing around the loss of manufacturing and the kind of jobs that it used to create. It will not work to address emotions of that magnitude by labeling people as whining or lazy or resistant to change. Obviously, anger, shame, and horror left unchecked are not going to help anyone better their economic circumstances, and they shouldn't be pillars of national economic policy. The current free trade issues though are substantially morally hindered by the very real fact that at the moment, workers cannot relocate as freely as the trade goods or manufacturing. I cannot easily move to India to staff a call center or to China to manufacture cars. If employees could move around with the work, there wouldn't be such a long gap between the time when goods are insanely cheap to produce abroad and when the wages go up so that the situation equalizes. The situation with political borders, international crime, and cultural concerns is that workers aren't going to be free to move around for some time to come. This is also similar to the hurricane problem--it really bothers people to think of paying twice as much for gas in Houston than Austin, when the gas cost about the same to produce for both places. In the abstract, this is less a problem with the price of gas than with the limits of human mobility (they'd all get gas in Austin).
If I were a great champion of unfettered trade, pricing, etc., I would spend a lot of time trying to think of ways to allow for more human mobility. Allow workers to be as free as the trade is by addressing international crime and regional political and legal disparities. Right now the world is flatter for a manufacturing company than it is for a manufacturing worker. As it stands, it seems free trade functions as a kind of protectionism for corporations, so that they don't have to contend with pressure from labor about things like wages and conditions.
This is an excellent post with numerous things worth thinking about.
Here's just a few responses.
First, I think it is worth recognizing that the basic structure of a business consists of an owner, or group of owners, who have an idea to produce a good or service they believe will be demanded by consumers. Typically these owners will invest some of their own money (capital), or will borrow with its resulting obligation to repay, to get the business started. The chance that they will lose all of this money is the risk they take.
Now typically a business needs more people to complete all of the tasks necessary to produce, sell, and distribute the good or service and so will enter into contracts with employees. The contact consists of a voluntary exchange of the sort, "if you work 40 hours per week and complete the following tasks that I the business owner needs to have done, then I will pay you $xx per week + certain fringe benefits". The worker is free to accept the terms or walk away. If other jobs have better terms this person will walk. If they are the best the person can find he will take the job. Sometimes if a person has sufficiently strong qualities and if the business is confident that it will have sufficient revenues in the future the two may create an extended contract for say a year or more. Of course an employee may want a longer contract the employer a shorter one, and so they will likely meet somewhere in the middle. Beyond the terms of the contract signed by both parties though, there is, and should be, no obligation or expectation to extend the contract further at least until discussions for renewal. If the contract has no length then the employee should understand that the employer can release them at their own discretion. In the same way, with no contract length the employee is allowed to walk away at any time.
Indeed consider your point that workers come to expect, rightly or wrongly, that they can count on their job to continue. If you accept that point then shouldn't the employer in other circumstances, come to expect that the employee will continue to come to work? With implicit stability wouldn't the employer be able to cry foul if a long term employee suddenly quit his job?
Finally though, the reason it is important to allow employers to discontinue employment of even long term workers (subject to compliance with any contracts) is because, 1) market conditions are continually in flux; so what was a viable production plan last year may not be viable this year, and 2) because the owners, who are the one's risking their own capital, are allowed to make the decisions on how to run the business. If an employee doesn't like the way a business is run, or has a better idea on how to run it, his only option is to start up his own business and control it himself.
I have more ideas about this post but my time is limited. .... more later.....
Post a Comment