Thursday, September 01, 2005

Does Price Gouging Exist?

Prices are spiking on gasoline, and the complaints of price gouging are flooding into the FTC. My question is, is there such a thing as price gouging? In a voluntary transaction between two entities, how can there be?

In this particular situation, the probability exists of some level of shortages in supply around New Orleans especially. Should those gas stations be compelled to sell at the price they sold the day before, even though they will surely sell out and essentially be out of business until supply come back?

Their gas is worth exactly what customers are willing to pay to get it. If they charge too much, people will look elsewhere. If they charge too little, they will sell out and have to shut down until who knows when.

In Bend here in Oregon, there was a biodiesel station selling it for around $3.10 a gallon. If regular diesel blows past that, say to $3.20 or so, is it price gouging if the biodiesel station raises their prices to $3.40? There was no change in their supply or costs, how can they justify 20 cents for nothing?

They are justified, of course, because demand changed. Their supplies are always limited, but people will preferentially buy biodiesel as it nears diesel prices. If diesel passes it, well, they will not be able to supply all of their customers. The choices are: the price goes up to adjust to demand, or the owner is compelled to sell at some other price someone else "feels" is appropriate.

Our system naturally adjusts to these situations, and it is best left alone. It is the only rational way to allow resources to be allocated correctly. Prices through the roof? Probably people will adjust their driving, share rides, walk or ride to work, etc. People in life or death situations or businesses will likely pay it, because it's worth it to them.

That is exactly as it should be, unless you want politicians setting prices, causing outages and rationing as in the 70s. As kind as it sounds on the surface, it is cruel, irrational, and damaging to artificially "correct" our system, it just happens that if it hurts a few business owners over a crowd of workers, people think it's OK. It is not.

If businesses should be compelled to sell at a "reasonable" price, set by some official as opposed to supply and demand, I wonder if people would agree to be compelled to buy gasoline at that same price when a cheaper, better, alternative comes along, as it will eventually. What will happen when prices go through the floor and nobody really wants it? Who is looking out for the jobs and millions of dollars invested in gasoline production and sales?

No one is. Or rather, no person is. But Capitalism is. It is looking out for the people of New Orleans as it looks out for all people and businesses, by allocating scarce resources in the most rational manner possible.

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