And then the government simply becomes the proxy for the rich & influential. The govt (the politicians beholden to fat wallets) will make sure their needs are met first. Did anyone notice that none of the Soviet Union politicians had to wait hours in line for basic needs like food?
Let’s talk real life here instead of naive theories. It’s a well-intentioned scenario you’ve outlined, yes, but still naive nevertheless. “Real life” means we deal with real humans in positions of govt instead of impartial robots doling out “fairness”.
Prices have lots of drawbacks but it’s the best arbitrator we have until someone invents a telepathy machine that can impartially read everyone’s mind and weigh their needs.
A question for the free market absolutists who believe the government shouldn’t regulate economic transactions: Do you think mugging should be illegal? I mean if I’m a mugger I’m just setting a price on your desire not to be shot. If you’re strongly motivated to keep your wallet you can just refuse to give it to me and accept the consequences of me shooting you.
Some of you might argue that mugging is illegal. Well sure it is. Does that make it wrong? Price gouging, as several people have noted, is illegal. But people argue that’s unjust government interference in the free working of the marketplace. Okay, so is a law against me and my gun. Let’s eliminate laws restricting price controls and the use of firearms in financial transactions and let the market seek its own level.
Personally, I’m not an absolutist. I see the free market as an ideal. It’s something we have to create and maintain. Sometimes the conditions of a free market do not naturally exist and then the government can step in and force people to act as if those conditions existed. In other words, the government can say that if there hadn’t been a hurricane last week that temporarily shut down normal transportation facilities, you wouldn’t be able to sell the food you had on hand for a 1000% profit. And the government can say that you wouldn’t be willing to give me your wallet unless I was threatening to shoot you. And - and this is a conceptual leap - the government can say that when a corporation sells 90% of the products in a market, the remaining 10% is not strong enough to offer the real competition that a free market requires to function.
Amazing how that happens, isn’t it? It’s a little bit of wonderful magic that the price mechanism induces in enterprising human beings.
Or, you could restrict the price to $500, and have immediate shortages when people need it the most. Followed by generators trading on the black market at $5000, in violation of the law. Which makes criminals out of ordinary citizens and wastes government resources on foolish legal enforcement.
When there is money to made, resources will flow to the opportunity and compete away the excess profits.
But Jimmy Carter didn’t realize that. Neither did Nixon, for that matter. Our current President, despite his supposed vast intelligence, doesn’t seem to get it either.
It’s the people who believe that the free market is always right that are the naive theorists. The realists are those of us who recognize that while the free market works in general, it doesn’t always do so in every specific situation. And it’s in those situations where the government should step in and fix the problems.
Are you whoosing, or do you honestly not see the difference between
Removing threats of force and coercion, so that voluntary transactions can take place between consenting adults?
Invoking threats of force and coercion, so that transactions become involuntary?
Any libertarian or free-marketeer you’ll ever meet would agree that the proper role of government is to remove the second item above, so that the first can take place.
Looks like we’re drifting back to the ridiculous strawman part of the anti-free market, anti-libertarian debating spectrum. Yet again. Groan.
The free market is not ‘right’ or ‘wrong’. The free market does not pass judgment, make decisions, or attempt to impose anything on anyone. The free market is not an actor. The free market does not ‘do’ anything. To anyone. (Unless externalities are introduced…which is a point we can discuss if you want).
All the free market is, is a collection of voluntary decisions made by individuals. So if you don’t trust the free market, what you are saying is that you don’t trust yourself to make the right decision, and live with the consequences of that decision.
Ruminator,
OK I haven’t looked at the cellphone industry in sufficient detail to know that SMS prices are a result of implicit collusion. Still a service whose price is vastly greater than marginal cost is a departure from what the competitive market would normally produce. And given that there are typically only a few service providers in any particular area, it is not unreasonably to suppose that prices are being determined non-competitively. And the issue isn’t that customers are free to not use SMS if they don’t want. The issue is why prices haven’t dropped given the minuscule and rapidly falling costs of transmitting small amounts of data.
Are you sure it wasn’t restrictions that were introduced on convertibility of the currency that caused the problem?
Or perhaps the government’s refusal to acknowledge that it had inflated its currency beyond it’s ability to back it, but just didn’t want to admit that fact?
Explain to me how anyone can be “gouged” on something they can choose not to buy? That makes no sense.
I willingly spread my butt cheeks and backed my ass into the guy’s erect genitals – therefore he “raped” me. How does that logic work?
And I believe govt should step in and “fix” and “cap” your salary. Hypocrisy or not?
I just had a plumber fix some faucets. The bill was over $500. I say that’s too much. I say that’s gouging. The government should do something about it. Damn it… plumbers make too much money. They are unholy parasites taking advantage of people’s misfortunes with water leaks. I feel better getting that off my chest now.
Besides the other reasons mentioned, price gouging encourages and excuses violence. If I need something to survive, and you are trying to extort money I don’t have out of me then I’m likely to use force to get it if I can. And I’d be justified in doing so; YOU are the one who turned the situation into a matter of survival.
Of course, the free market fanatics don’t acknowledge this; they only believe in the virtues of ruthlessness from the top down. It’s all right to oppress, hurt or kill people with economic power, because that’s what the rich has; it’s bad for their victims to turn to violence, because stomping on the poor is the whole point.
I remember that. I even remember news articles about some of the last guys in with their trucks full of generators who were complaining that the price had dropped back to normal and they were actually losing money.
This is evidence contrary to Lantern’s assertion that disasters happen too fast for market mechanisms to work.
Well as a practical matter the government in democratic governments aren’t beholden to the interests of the rich thought the rich certainly have a disproportionate amount of power. This is because political power is ultimately decided by elections and every person’s vote counts for the same. In the market by definition a rich person gets more votes. And if you want to talk about real life democratic governments have intervened in countless emergencies and saved millions of lives. For example under the British rule in India famines were common and the last major one in Bengal (which Amartya Sen lived through) killed millions of people. In independent India famines have largely been eradicated mainly through government intervention.
I wonder - what’s the actual marginal cost of sending a text message? Just guessing - probably well under a cent. Have text messaging rates come down as available cell phone bandwidth expanded? Do major companies compete by price on the issue of text messages?
Typically fair competition of a common product results in a price somewhat higher than the marginal cost of the product or service. What’s keeping text messaging rates at (my personal guess) at least 10x their marginal cost when there are competing companies in the market?
Given that there are relatively few providers, and the field is extremely hard to enter - both in initial capital costs and also the need for government-regulated frequencies - my first guess was that there was a collusion, either implicit or explicit, to keep the prices artificially high. Another possibility is that consumers on average don’t bother to seek out other providers on the issue of text messaging pricing - maybe $.10/text doesn’t bother casual texters that much and the hardcore ones use unlimited plans. I don’t know.
Given that the government is pretty much in charge of whether you can or can’t enter the market as a cell phone provider, and on this issue the different companies seem reluctant to compete on price, the possibility of collusion may make it worthy of government investigation. I’m not saying it is, but it’s not a ridiculous idea.
If the government wanted to stop price gouging in a disaster area, why can’t they just buy up the needed goods where they are in surplus elsewhere, bring them into the disaster area, and sell them themselves for whatever they think the price should be?
But doing the right thing yourself is so hard compared to pushing everyone else around and making them do what you think is right.
“Marginal cost” only has real meaning for people inside the company. Revenue streams coming in from various sources pay for various projects inside the company. Only the internal management understands how all the $$$ are criss-crossed inside the company. Money is fungible. That’s what I tried to explain in my previous post. You can’t be an armchair quarterback and talk about “marginal cost” intelligently unless you’re analyzing something simple like Susie’s little lemonade stand.
The Tylenol pills that cost $100 at the hospital that you can buy from WalMart for $5? That $100 pill subsidizes the poor people who end up in the emergency room that don’t pay. The restaurant charges $15 for a glass of wine that you can buy for $5? It’s just a revenue stream to help subsidize the cost of laundering the table cloths, the electricity, etc. Only the people who run the company can play around with concepts of “marginal cost.” To us on the outside, it looks ridiculous to charge $100 for Tylenol… that’s because most of don’t ever run a business. Do you really want to see a restaurant check that has a hundred line items? $2.32 laundry + $1.10 electricity + $0.75 fire insurance fee,etc … no that complexity breakdown would be silly. We simplify by transactions between seller & customer by seeing the $15.00 glass of wine.
Every though most do not run a business, you can apply the same thinking to your job and your salary. The company does not pay you a salary based on your cost of gas. The company doesn’t say, “we noticed you moved 10 miles closer to work so we’re reducing your salary by $1000 a year because obviously, your marginal cost to come here has dropped.” That’s nonsense because “marginal cost” has no meaning to that company — it only has meaning to you because you’re the only one who knows the totality your family’s finances. Maybe you did move closer to save commuting costs but you also spent more on your wardrobe to stay competitive in your job. Only you know all these details.
It would be an interesting answer academically but it’s not relevant to the ultimate price they want to charge.
The problem here is that none of us know enough about the details fo the market to know for sure whether or not text messaging prices are out of whack or not. It wouldn’t surprise me if they are, because there’s a lot of interference in these markets.
But its’ possible they’re not. Why should text messaging prices fall to the level of the marginal cost of sending the data? Consider the following scenario: Setting up a text messaging service costs $1 billion in capital. Giving iPhones to customers results in an up-front loss of $300 per customer, which must be recouped over 2 years. It is assumed that, with the pace of technology, the whole infrastructure will have to be replaced in five years. There is risk that new technological innovations will make the whole system out of date before then or will cause demand to drop throguh the floor. So there is that risk as well.
Then there are other factors, such as text messaging potentially eating into the airtime profits that were used to pay the subsidies on the phones. If you can text someone, you don’t need to phone them. If the company makes most of its profit from airtime sales, text messaging undercuts their own business model, so it has to be priced in a way that allows them to still make money.
Given all these factors, plus no doubt others I’m not even aware of, my guess is that the marginal cost of actually sending the data is almost completely irrelvant to the overall business model.
Has it occurred to you that a “free market absolutist” would oppose shooting someone without their consent for exactly the same reasons that they’d oppose taking someone’s property without their consent? Your strawman is flawed from the start, since your “free market absolutist” would not allow the mugger to enforce the threat the entire scenario is based on.
No, you wouldn’t. Even if you can’t live without it, someone offering to sell you something is not responsible for your need, and rejecting their offer makes you no worse off than if they had not been available to make the offer in the first place.
It’s relevant in that it sets the bottom end of the potential price for the service. If the marginal cost was 9 cents, then them charging 10 cents is certainly not price gouging - they’re barely profiting.
But if the marginal cost is a quarter of a cent, and all companies involved have decided the appropriate price is 40x the marginal cost, and no one is willing to undercut that in order to potentially compete for market share, something may be up.
For figuring out what any individual company wants to charge, that’s true. When companies try to price compete for market share, and they can undercut a competitor while still making a substantial profit because the price is way higher than the marginal cost, they usually do. If one company reduced price to 8 cents/each, and some heavy texters decided to switch to them, they’d be making a profit they weren’t before on the text messages alone (7.75 cents per instead of 9.75 cents in my hypothetical example) and they’d get all the extra business of the person’s regular cell phone bill. They’d make less per text, but more overall - and as long as they’re still making a profit on the texting, it’d be in their best interest to cut the price.
So why wouldn’t any of them cut their price in order to attract market share? Possible reasons are that the marginal cost is so high that cutting prices further would make it unprofitable (and this is what my speculation was intended to address), the idea that the consumer doesn’t really care what the price is on that particular service and therefore wouldn’t choose providers based on it, or that there’s some sort of collusion going on.
And what makes you think those same people wouldn’t just jack up the price for the government ? That’s a good way to end up having to spend millions or billions more than you need to.
If they are holding people hostage for mopney, then those sellers have no credibility if they complain about coercion over prices. They should be glad they don’t get imprisoned for hoarding. Or just killed by the people they are exploiting.
