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Jul 4, 2008

No Price Gouging Here

We're Honorable, So We Don't Have Any Stuff
It had been raining for three days. Jim went to Sam's Hardware Store in town. There were deep road puddles everywhere.

Jim: Hi Sam. I'm looking for a good water pump. My basement is drowning.
Sam: Hi Jim. I'm sorry to tell you that I had three WP-ABQ pumps in stock before this rain. A pretty good value at $140 too. But, they sold out.

Jim: I'm in trouble. There is 3" of water in my basement and it is rising slowly. I really need that pump.
Sam: I feel for you. My last pump sold to a guy who didn't need it now, but wanted to be safe. At the standard price of $140, he decided not to wait.

Jim: Have you ordered any more of them? When could I get one?
Sam: My usual re-stock is in two weeks.

Jim: Cripes! Can't I get one any faster? I'm willing to pay more.
Sam: Pay more. That reminds me of that big rain 4 years ago. I wanted to do some good, and make some extra money, so I rush ordered 8 of those pumps, and even paid a private trucker to ship them. I figured I could sell them for $280 each, and I'd be OK even if I had a few left over.

It worked out pretty good, until one of my customers (go figure!) complained to the Office of Consumer Protection. Said that I had "price gouged" him, because the usual price is $140. After the lawyer's fees and the fine, I was out $4,500. That sure taught me a lesson. Now, I only deal at the usual price. It isn't worth the trouble and risk to order ahead at that price.

Jim: How about a rush order now?
Sam: I could ask for a fast shipment and charge you $25 more. I even have a form from the Office of Consumer Protection. But, you would need to have it notarized at the bank, and it would still take 3 days for the pump to get here. Do you want to do that?

Jim: No Sam, it seems I'm stuck. I'll have to drive 20 miles to MillistonVille and see if they have any there.
Sam: Good luck on the roads. Be careful of some suppliers. Those pumps are great, but you don't know if they're used or broken until you hook them up.

Jim: Thanks Sam.


Feelings about price gouging are emotional and wishful. They are something like  "The universe is against me, and my fellow man wants to charge me for help and supplies. I can't do anything about the universe, but I can prosecute those no-good businessmen."

We all wish that a guardian angel would help us in an emergency, but we are stuck with help from our fellow man. Some will volunteer. Some will pay higher costs to deliver goods at a higher price, possibly much higher. Some will have inventory that they parcel out at what the market will bear.

Should we investigate and prosecute the ones who are making a windfall profit? No.

People with the right skills, who own goods in sudden demand, or who have the connections and experience to acquire needed supplies, are just lucky. It may seem wrong that some people can profit from other's needs, but that is just the way the world works. The people in need cannot make their lives better by promising to investigate and punish those people who can help them. This promise to punish discourages all help: help from the good-willed as well as help from opportunists.

Planning Ahead

The idea of "price gouging" poses the question: In which situation are you better off?
(1)  The goods you want are sold-out and unavailable at the usual,
    lower price, or
(2)  The goods are available at a temporarily higher price.

In case (2) you can decide if the price is worth it.

When merchants are punished by laws against price gouging (as in New Jersey), they have no incentive to plan ahead by stocking up. So, if you individually have not purchased ahead, you are out of luck.

A good effect of free market pricing is to usefully ration limited supplies. At twice the price, many people will limit their purchases to just cover the emergency, rather than buy up everything they can. More people are able to get needed supplies.

Failures At Gas Stations

The worst effect of price gouging laws is to dissuade companies from planning ahead for emergencies. Existing companies are much more knowledgeable and better positioned to serve the public than emergency teams trying to set up infrastructure in one or two days.

Consider a gas station with no emergency electric generator. If public power fails, they can't pump gasoline. Why don't they all have a generator?

Generators are expensive to buy, install, and maintain. The station can't recover these costs in normal times, as they compete against stations that don't incur that expense. The responsible station must rely on much higher prices in emergencies, when they can pump gas and their competitors can't. But, they can't charge higher prices in emergencies, so they don't acquire emergency equipment.

The same goes for larger gasoline storage. The station doesn't need it in normal times. The costs of a larger storage tank could only be recovered by "price gouging" in emergencies.

Provide Choice

Our politicians should allow free trade at any price. This would not stop them from providing emergency services. It would merely allow an additional private choice in emergencies. Politicians can advise people that aid is on the way. People need not buy the goods they need at higher prices if they want to wait "just a bit" for government help. Let the people decide.

Politicians do not make things better by denying the public an option. That is the government monopoly at work. A cynic might say that politicians do not want to be compared to privately provided emergency services. It might make them seem less useful.


Gas Prices: The Real Story
09/12/08 - Rich at Shots Across The Bow investigates why gas prices are spiking in Tennessee. Supply, not gouging.

But now Ike is headed for Galveston, and the pipelines are being shut down completely. When you're in a low stock condition, you are relying on a steady flow of gasoline to maintain smooth distribution. When that steady flow is disrupted, you're only hours away from shortages.

Consequences of Price Gouging Laws
06/01/09 - Knowledge Problem by Michael Giberson

[edited]:  West Virginia's price gouging law was triggered by the May 9 declaration of emergency for a flooded area. Marathon Oil temporarily halted sales to independent gasoline retailers lacking a current supply contract. Marathon said that it would lose money on sales made under the capped prices.

West Virginia's “anti-price-gouging laws allow businesses to increase prices to recoup costs if the increase is directly attributable to additional costs imposed on the business.” That is an unclear standard.

Georgia had higher prices due to supply disruptions last September. Fines for price gouging have ranged up to $20,000 plus restitution.

Marathon's wholesale gasoline costs have increased over the three weeks since the declaration of emergency in West Virginia. How much of that increase is “directly attributable to additional costs imposed on the business”? Marathon may have reasonably decided not to risk a lawsuit, and not pursue the opportunity to “recoup costs” under the law.

It is legal to not sell gasoline to new customers. So, why should it be legally risky to offer gasoline at some high price to those new customers?

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