A lot of people were upset when the gas shot up on after the terrorism and legislators started threatening that there would be penalties for “price gouging.”
Not understanding this concept of “price gouging” I asked some people. I said, “what is price gouging” and they said, “its when businesses raise their prices too much beyond what their goods actually cost.” This didn’t make sense to me because I had always thought that the price of something was simply the amount that people were willing to pay for it. I mean, nobody is forcing anyone else to pay 5 bucks a gallon for gas. If people are willing to pay that much, that IS how much it costs. Demand for gas shot up within hours of the news from New York and DC. Eventually stations were closing because they had run out. People were lining up in the streets for gas. Are gas sellers then supposed to ignore the huge demand and keep selling as if they hand an endless supply and as if people were not actually willing to pay much more for their product? After everyone had their tank full the demand for gas dropped sharply and went even lower than before the terrorism.
Ok, so I’m probably talking out of my ass here. Someone correct my ignorance and tell me what price gouging is because I obviously don’t see. To me it just seems like a way of creating a temporary price cap which in time of sustained increase in demand would just lead to shortages and a black market.
The difference between “Price Gouging” and the normal inflation of a product everyone wants is:
It is inherently immoral to gain profit solely by the suffering of others.
This type of profiteering encourages all other business to increase prices accordingly to gain similar profit
The result - if unchecked - is that a loaf of bread is soon out of reach of people of lower income who are trying to feed innocent children.
In short, the problem is not that gas costs $5.00 at one particular station - the problem is that if allowed to happen, the ramifications are widespread.
(by the way, if you think what I’ve described above doesn’t actually happen, research some eastern block economies)
The main difference between “price gouging” and “just trying to make a profit” is where and when it takes place. “Price gouging” happens after an earthquake, or a hurricane, or some other disaster, when you’ve basically got a captive audience–people can’t go anywhere else to buy gas, or bread, or milk. If you raise your prices then, it looks like you’re just trying to profit from their misery, and it’s called “price gouging”.
The problem in the Peoria area was not that gas cost $5.00 a gallon at a few gas stations here and there–the problem was that it was at many of the Casey’s General Stores (it’s a chain, like 7-11), which made it look like “organized price gouging”.
Price gouging can also cause civil unrest. People will see the high prices and think that there is a shortage. Then all sorts of nasty things can happen, like hordeing, looting, etc.
Price gouging is opportunistic, excessive profits. It’s not necessarily in response to natural disasters, but it does come from exploiting conditions in the market that are illusory. The virtue of a free and competitive market is that price gouging is punished quickly and effectively. I did cost analysis for a manufacturer of commodity household goods (generally a very competitive market) for a year and was routinely told to drop prices because we’d be making too much money (and thus pricing ourselves out of the market).
Last year, when the price of gas shot up, it was called price gouging because there was a perceived shortage of oil from the middle east, when in fact the shortage was here, in terms of processing and distribution facilities, and it was a deliberate shortage aimed at driving prices up. When
this was revealed by the press, American companies changed their story, and claimed then that EPA regulations governing additives were responsible. When that was demonstrated to be false (there was no shortage of additives, nor did they increase in price), gas prices fluctuated back down again.