What, exactly, is "price gouging" in re: gasoline prices?


As stated by Sam Stone, the idea of “price gouging” was invented by people who have never taken an Econ 101 course.

An “anti price gouging” law would be nothing more than a “price fixing” law. And guess what happens when you fix prices? Shortages and surpluses are the inevitable result. Communist-block countries learned this the hard way.

So let me repeat: assuming there’s free-market competition, and assuming there’s no collusion going on, all prices are exactly what they should be. If the price for a gallon of gas is $5.00 at a particular gas station, then that’s what it should be. If the price is $2.00/gallon at another station down the road, then that’s what it should be.

Such demand & shortages (interrelated) can create a situation where market forces don’t exist. If only one source of fuel is available, there’s no competition. If demand is beyond anything (a) expected and (b) necessary, i.e. panic-buying (c.f. the fuel protests in the UK a few years ago), then the system again breaks down.

You’re insisting that there cannot be a point, in the real world, at which market forces cease to function. You need to back this up with an explanation of how panic-buying and exploitation of extreme shortages fits into your ‘economically literate’ understanding.

Actually, raising prices is an excellent way of balancing a limited/fixed supply with an increasing demand. Works like a charm. And without the need for government intervention.

You missed the ‘in case of disaster’ bit. Y’know, when things more important than rich people getting to work on time take priority?

Yep, you’re right. Here’s my revised post:

Actually, raising prices is an excellent way of balancing a limited/fixed supply with an increasing demand, even when there’s a disaster. Works like a charm. And without the need for government intervention.

This one is pretty interesting, but unfortunately is destined to become a Great Debate. Actually, it already is.

So, off we go.

samclem GQ moderator

That leads to people starving and dying in a disaster for no reason except they’re not the top bidder for basic supplies. Supplies in a disaster need to go to everyone until basic needs are met.

And here’s my revised answer:

Works like a charm for the victims of the disaster, or works like a charm for a handful of people fortunate to be able to exploit the lack of competition?

Umm… what was in short supply and being “gouged” in Ohio as result of 9-11?

Whether you realize it or not, GorillaMan, what you’re basically advocating here is communism. “From each according to his ability, to each according his need” and all that stuff. The U.S. is not a communistic country. If you desire communism, might I suggest moving to North Korea?

I should explain why we free-marketers don’t condemn raising prices after a disaster, and in fact think that it’s immoral not to allow sellers to raise prices. Imagine a hurricane or other natural disaster, with price controls. The gas station has a limited supply of gasoline, because he can’t get a new shipment for a while, and the state has limited his price to $3/gallon. The first thing that happens is Joe Bob in his crew cab V-10 pickup truck with dual gas tanks comes in and fills that sucker up. The gas station runs out of gas quickly. Now Sally has a dying mother, and needs fuel to get her mother to the hospital, but gas is not available.

This is really the stuff that happens. If the free market were allowed to work its magic, Joe Bob would get just enough fuel becuase the price is $6 per gallon, and Sally would be happy to pay that price to get her mom to the hospital, and there will be fuel left for her.

And GorillaMan, you don’t have to have competitors for the free market forces to work. They work with just a single gas station. As long as there are willing sellers and willing buyers, it’s a free market and corrects for supply and demand.

The problem is, many of the so called “economic literates” are making an implicit assumption that the demand curve slopes downwards at all times. Such an assumption might be true under normal situations, but in a disaster situation, the normal flow of pricing information is disrupted and the demand curve flops around every which way. In such a system, the market will not be efficient at allocating resources and consumers are unable to make rational chioces.

In normal situations, consumers are fine paying $2.80 a gallon or whatever because they know that no station within a reasonable driving distance has prices much above or below that since the markets work. In a disaster situation, the consumer has no idea what the going market rate is and is thus forced to accept whatever rate the producer demands. ne petrol station might be charging $6/gallon while the others around him are only charging $3.50 but the consumer has no way of knowing.

In these situations, fixed government pricing + rationing can actually lead to more efficient distributution (by which, I mean utility is maximised) than free market pricing and this is what price gouging laws are ostensibly meant to protect against.

I refer to all supplies including food, water, clothing, and anything people need to survive a disaster. The supplies need to be rationed and used where needed, not sold off to whom ever has the most cash, gold, diamonds, or such. I am not talking about weeks down the road when people are not in danger. Do you think people with a lot of assets have access to a bank during a disaster to withdraw money? Should they loot the ATM’s so they can pay for supplies to get though a disaster alive? People will do what they need to in a disaster to survive. The likely out come would be fighting over the remaining resources. I can’t help it if you can’t see the reasoning behind what I said. The wiliness to share during a disaster so everyone can make it through, is what I consider a good neighbor and person. Morality is just what a person believes is right, and no two people have the exact same set of morals. Ethics is the standard to which you hold yourself accountable. I’m done here. Adios.

Government agencies are far more able to absorb such a price hit, and they are the ones who we most want to have access to fuel in a crisis. Rich or poor isn’t going to mean diddly if your emergency services have to “share equally” with the local citizenry and end up short on fuel.

If you have a real crisis, it IS worth it to pay $6/gallon for gas.

A crisis is not getting fuel for the generator because the kids wanna play xbox.

As is most folks have little business out driving around other than trips to and from where you will be aquiring food and other supplies until things settle out.

Rich people being the only ones getting to work…uh…if the fuel trucks aren’t rolling there isn’t going to be much gas, not much gas = not much business because people are unable to get around easily.

So who are those rich people you are so worried about supressing anyway, people like business owners and community leaders who need to start laying plans to repair and clean up millions of dollars in damages to the city and infrastructure. You don’t go back to work until well after they do, if they can’t get to work, you won’t either because you won’t have anywhere to go to work.

These points nicely complement one another - if there is a sector of the market which will buy a minimum amount, no matter what the price (in drachillix’s strained defence of the usefulness of high prices, government agencies), then surely market forces no longer apply?

Hee hee. Stick with “commie bastard”, it generates that retro feel more effectively.

It’s hard to tell what people mean. Collusive behaviour seems to be part of it. Informational problems of the sort Shalmanese is getting at seem part of it. Some of complaints about price gouging seem incoherent.

Shalmanese’s post is a good one. People who are “free market types” should be cautious if a big part of their enthusiasm for markets is based on outcomes: markets perform well under a variety of circumstances, but it’s only under very specific cicumstances that they perform like “magic”. I’m not saying any regulation would improve matters, but the idea that petrol would be allocated optimally after a hurricane is ideology, not economics.

One further thing: price is* a rationing device.

Here’s a hypothetical. Imagine if an electric utility announced that in the wake of any future service disruption , they would auction off the order in which residential customers are reconnected. Customers simply offer as much or as little money as they feel is warranted by the situation, and the service is restored to the highest paying customers first. No one needs to pay anything, those who chose not to pay simply get their power back last. This would accomplish several things. It helps allocate scarce resources (utility workers) it maximizes profit, since it cost the utility little to accomplish, and no one is denied their service even if they can’t afford to pay anything. Would this be an acceptable practice?

It was gasoline. Some stations in Ohio raised prices to as high as $6 a gallon immediately after 9-11. http://www.bizjournals.com/cincinnati/stories/2001/09/10/daily49.html

This is an excellent example of market distortions as a result of catastrophes. We know now that there was literally no disruption of gas supplies – especially in Ohio – but panic/opportunism by gas station owners can cause panic among consumers, resulting in people thinking they need to buy gas NOW otherwise none will be left (because, in general, consumers do tend to think in free market terms, in which high prices equal scarcity).

I think what gas stations did in raising prices to insane levels for no valid reason is the economic equivalent of yelling fire in a crowded theater, and I think government should prohibit this type of panic-inducing behavior.

You have a cite that shows that gas stations raised their prices, thereby CAUSING a panic, and not that a panic happened, thereby causing gas stations to raise their prices?

While I lean towards the free market posts in this thread in general, I’d just like to say this post is incredibly dishonest.

It implies that advocating a specific policy in a very specific situation implies you are advocating it in general. It implies that a communist administration was suggested in general, as an alternative to the free market economy that the US enjoys. I see no reason to believe that this was claimed.

Surely food aid is only taking need into account, and therefore is communist. Surely anyone advocating food aid to people in disaster areas is advocating the dismantling of the free market economy and the introduction of communism in every single aspect of life? Clearly a case of taking things to their illogical conclusion. Might I suggest that anyone who is not expressly against food aid move to North Korea? I could, but I’d be either completely insane or a liar.

I would typically agree with the posters who express a desire to let the market decide. The market is a good mechanism for the fair distribution of resources. But I’d like to stress that the fair distribution of resources is the end goal. The free market is not the end goal, merely a mechanism. An extremely good one, that I feel is appropriate 99% of the time.

If in an emergency we found that the free market was causing certain people to hoard more supplies than they actually need and other people to be physically starving because they did not have the means to buy supplies, would all free marketers (including myself) still insist this is the correct mechanism? In the case where people have no access to their money because the bank cards are not working, would you object to the distribution of free (i.e. taxpayer subsidized) distribution of food? Surely this is against market forces, and only people who have some spare cash in their wallets ought to survive?