Posted by
Andrews on Thursday, September 18, 2008 11:21:16 PM
I was watching the local news concerning a shortage of oil at various gas stations and he made two remarkably stupid statements. First, he admitted to being puzzled why after a hurricane strikes "thousands of miles away" we "immediately" see an increase in prices. Second, he was upset that there were no state laws concerning price gouging, so that we could determine if price increases were "legitimate" or "due to gouging".
The first is just idiotic. Yes, the oil on hand was bought at old prices, but the retailers know they need to replace their stock, a hurricane causes shortages, and so the replacement cost will be much higher. If they bill at only a small amount over the original purchase price, they will not be able to buy replacement stock. Thus, they bill at a price related to the expected replacement cost, not the purchase price.*
A similar idiocy is the traditional newscast during an oil shortage, showing tanks full of oil and asking why prices are so high, thus implying there is no shortage, only oil company greed. This is akin to looking in your refrigerator to see if there is a famine. The stock on hand may be high, but if there are no replacements available, it makes no sense to sell that stock on hand at the purchase price. When replacements don't exist, or are incredibly expensive, the stock on hand is sold at a high price to allow for the possibility of replacing some small amount of it, as well as to keep it from being snapped up and resold at a huge profit. The high price makes sure some stock will always be available and that only the most urgent uses get the resource.
And that is the idiocy of "price gouging laws". There is no such thing as price gouging. Businesses charge what the market will support. There is no right or wrong, it simply is. If they charge too much, they have a glut and don't sell it. If they charge too little, other buy it and resell at a profit, and they eventually go out of business.
Price gouging laws attempt to keep prices artificially low in a crisis. That is good for politicians and bad for everyone else.
Let us say there is a crisis and only 100 gallons of gasoline exist in the area. If the price is held at $2/gallon, the first person to the pump will buy all of them, no one else will have any. The better solution is to let the price rise to $100 a gallon. In that way only those who most desperately need the gasoline will pay for it, it will be used carefully, and no one will buy it up to profiteer on the black amrket. Also, with such massive profits, new sources will be attracted. If gasoline is selling in the disaster area at the same prie as the rest of the antion, why would anyone take heroic efforts to bring in gas? But if there is a $99/gallon profit, I can guarantee many will be risking quite a bit to get gasoline to that market.
Despite the claims of my idiotic state official, there is no such thing as price gouging or distinction between gouging and "proper" supply and demand. It is all supply and demand, and there is no right or wrong, there simply is the demand, and the supply, and the market. What prices the market will support are no more matters of ethics than the fact that bread is edible and rock is not. It simply is.
Do we find it unethical that objects accelerate at 9.8 m/s^2 due to gravity? Then why do we find the actions of the free market immoral?
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* Accounting actually causes people to see "excessive profits" for the same reason. When prices are rising, the cost based accounting principles show huge profits, as profit is calculated on purchase price, not replacement price. However, in reality, those "profits" are going to buy replacement stock, and no one is actually seeing those supposed profits. However, that doesn't stop politicians from using them for demagoguery.