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“price gouging” Archive

Saturday

27

August 2011

1

COMMENTS

Private Sector Schools the Government on Emergency Response

Written by , Posted in Free Markets

We’ve seen the abysmal failures of government efforts at emergency response. Now, witness how the private sector does it:

Forecasters don’t expect Hurricane Irene to make landfall until Saturday. But for nearly a week now, big-box retailers like Walmart and Home Depot have been getting ready.

They’ve deployed hundreds of trucks carrying everything from plywood to Pop-Tarts to stores in the storm’s path. It’s all possible because these retailers have turned hurricane preparation into a science — one that government emergency agencies have begun to embrace.

At Home Depot’s Hurricane Command Center in Atlanta, for example, about 100 associates have been trying to anticipate how Irene will affect its East Coast stores from the Carolinas to New York.

…Those district managers have been focusing on stocking a short list of items, Householder says, including generators, chain saws, water and tarps.

Householder says those supplies are flowing to stores because of a process that began months ago, at the beginning of hurricane season.

…The system got a stress test a few days ago when Irene struck Puerto Rico, causing widespread power outages. Householder says Home Depot stores switched to emergency generators.

“All stores opened up the day after the storm came through,” he says. “We opened up on time and we were there, ready and waiting for our customers.”

…Walmart is able to anticipate surges in demand during emergencies by using a huge historical database of sales from each store as well as sophisticated predictive techniques, Cooper says.

He says that with Irene on the way, that system is helping them allocate things like batteries, ready-to-eat foods and cleaning supplies to areas in the storm’s path.

Walmart also has the advantage of having a staff meteorologist, Cooper says.

“When those forecasts come out, it’s great to have somebody in-house that can evaluate that information so that we can give real-time information to our associates, not only here at headquarters but out in the field,” he says.

Minor correction: Walmart does not have the “advantage” of having a staff meteorologist, they have the foresight to have hired a staff meteorologist.

Preparing and responding to emergencies is one of those problems typically cited as an example of that which only government can ever solve. Once again, this attitude is proven false. No one has greater incentive to meet the surging demand seen after emergencies than the private sector, and if government would remove its misguided barriers to the functioning of the price system and the free market, it could do an even better job in the future.

Tuesday

13

July 2010

1

COMMENTS

“Price Gouging” Laws Compound Natural Disasters with Political Disaster

Written by , Posted in Economics & the Economy, Energy and the Environment, Government Meddling, The Nanny State & A Regulated Society

Florida Senator Bill Nelson is seizing on the BP oil spill as an excuse to pass federal “price-gouging” legislation.  It’s certainly nothing new to see anti-market politicians stirring up populist rage with these so-called “price gouging” laws.  Many states already have them on the books, and politicians are quick to warn greedy capitalists against “exploiting” disasters by raising prices.  But these laws are really nothing more than price controls and, like all price controls, they distort markets and harm consumers.

“Price-gouging” laws generally prohibit “excessive” or “unconscionable” prices – both unconstitutionally vague concepts –   immediately following disaster declarations.  Prosecutions typically follow hurricanes, floods or other major events that knock out power and stress the availability of goods like ice and power generators.

Under normal circumstances, sudden increases in demand result in similarly sudden spikes in prices.  As prices go up, entrepreneurs in nearby areas are motivated to buy goods at their cheaper local prices, transport them into the disaster area, and then sell them for a handsome profit.  This is how price signals work to indicate where goods are most needed.  The entrepreneurs make enough money to justify their efforts, and people in the disaster area are able to get the extra supplies they need.  Yet despite the fact that everyone wins, many politicians have criminalized this behavior.  Rather than cheering the entrepreneurs for bringing relief  supplies that would not otherwise arrive to post-disaster areas, state government officials often prosecute, fine and even jail them.

Not satisfied with the fact that a majority of states already have these misguided price controls on the books, federal politicians have repeatedly tried to have them enacted nationally.  A bill that would have criminalized charging market prices for needed goods passed the House in 2007, but failed to get the 2/3rd votes necessary to override President Bush’s threatened veto.  Now, with a more sympathetic President Obama in office, such legislation could potentially return, and pass.

Bill Nelson’s state of Florida already unnecessarily perpetuates shortages after hurricanes and other disasters with misguided price controls.  He shouldn’t force similar pain on the 20 or so states without price gouging laws.

Monday

9

February 2009

0

COMMENTS

Kentucky And Federal Aid

Written by , Posted in Free Markets

Many of you may not be aware, since it’s getting virtually no media coverage, but Kentucky is reeling from a disasterous ice storm that has left more than half a million without power, perhaps for as long as a month.

Reason has done a good job of looking at the federal government’s lack of response, as well as a brief history of federal disaster responses.  Not surprisingly, Reason takes the position, which I share, that the federal government is incapable of competently dealing with such matters.

At the end of the article someone actually helping – by selling generators at marked up prices – is highlighted:

Enter David Strange, the enterprising figure the Associated Press calls the “generator man.” Strange drove the hills and hollows of backwoods Kentucky delivering and setting up generators to those without power—at a $50 to $100 mark-up over retail. Willing customers included a dialysis patient and a powerless 80-year-old woman dependent on an oxygen system. They called him a “godsend,” although Strange prefers “jack of all trades” or even “hustler.” To Adam Smith, he would be recognizable as an agent of the invisible hand.

If President Obama were nimble, he would give Strange a fancy federal title and take credit for his actions. That would make far more sense than trusting the federal government to come to the rescue in times of distress.

Not only will President Obama surely not do this, he’s as likely to throw the man in jail as anything.  You see, “generator man” is actually committing the horrible crime of “price gouging.”  That means that he’s delivering a product to the people who need it most.  Terrible, I know.

Tuesday

14

October 2008

0

COMMENTS

More On Gas Shortages

Written by , Posted in Energy and the Environment, Free Markets

More on the government created gas shortages, from Robert Prechter:

Q: Doesn’t reduced supply — scarcity — create shortages?

A: No. In a free market, shortages are impossible; there is only a price. Rubies and Picassos are scarce, but there’s never a shortage of them. You can buy all you want any day of the week. Just pay the price.

Q: So how is the state causing a shortage?

A: The overriding cause of the shortage in the Southeast is state legislatures’ mandates that anyone selling gasoline at market prices will be labeled a “gouger” and fined $10,000 to $25,000.

Q: That’s it? That’s the reason?

A: That’s all there is to it. Only government can create shortages. If the price for gasoline had been allowed to fluctuate freely and rise to $5 a gallon locally, it would have provided plenty of incentive for truckers to siphon gas from other states and haul it to Georgia, Tennessee, North Carolina and Alabama. But as it stands, every one of these states has an “anti-gouging” law, and every one of their governors stood up to announce that he would vigorously enforce it. They may as well have said, “I demand a gas shortage.”

Wednesday

1

October 2008

2

COMMENTS

More Consequences Of Market Interventions

Written by , Posted in Free Markets

While much of the discussion lately has been over one big interventionist created disaster, the “financial crisis,” I thought I’d highlight another, though ultimately less severe, government created mess.

Several southern states are currently experiencing gas lines and shortages. News reports typically chalk these up to nothing more than the consequence of supply disruptions from Hurricanes Ike and Gustav. While the closing of refineries has reduced supply, mere reductions in supply do not create shortages and lines. What creates shortages and lines are rules that prevent prices from adjusting accordingly.

The affected states all have one thing in common: price-gouging laws that kicked into effect after the hurricanes hit. In Tennessee,

It’s safe to say all drivers in the Middle Tennessee area felt some pain over the past two weeks. At first, there were only signs of possible price gouging. Reports came from East Tennessee and North Carolina of $7 a gallon gas. Tennessee officials began monitoring an increase in consumer complaints of price gouging and warned of penalties.

Price complaints tapered off when the shortages began. For the first time since the late 1970s, the Nashville area saw tempers flare in lines at the gas stations, and large numbers of residents worried less about the price of gas than about whether they would have enough fuel to get to work or home.

The same happened in Georgia:

Earlier in September, the governor asked for and received several waivers from the U.S. Environmental Protection Agency on clean-fuel regulations. He also declared a state of emergency — the first part of the emergency plan — which enabled anti-price gouging laws. On Tuesday, he eased licensing restrictions for haulers.

Here‘s how it worked out for them, as described by a September 29th article:

As a gasoline shortage in the South drags through its second week, drivers have gone from being mildly annoyed to deeply frustrated, with lines hours long at service stations in Georgia, North Carolina and Tennessee.

Let me reiterate to make it perfectly clear: “Early in September” the government enables anti-price gouging laws, by the end of September there had been 2 weeks of gas lines. In every case the government price gouging actions precede the shortages.

Price gouging laws -> shortages and lines.

The John Locke Foundation describes the same phenomenon in North Carolina:

Consumers can blame North Carolina’s price-gouging law for the gas lines and shortages appearing in the wake of Hurricane Ike. That’s the assessment of a John Locke Foundation analyst who has studied the unintended consequences of price-gouging legislation.

“Gas station owners are afraid to raise prices in light of threats of prosecution from state government,” said Dr. Roy Cordato, JLF Vice President for Research and Resident Scholar. “Because those owners refuse to raise prices, consumers continue to flock to the pumps, and the stations run the risk of running out of gas.”

The current problem with shortages and gas lines is far different from the situation that followed Hurricane Katrina in 2005, Cordato said. “North Carolina had no problems with shortages or long lines at the gas pumps after Katrina because the price system was able to work,” Cordato said. “The only difference between 2005 and 2008 is the new version of the state’s price-gouging law.”

The news reporters and commentators fail to make this connection.

The same Tennessee article from before suggests that part of the problem was hoarding:

Finally, there are lessons for us, average consumers, many of whom were not on best behavior during this gas shortage. As state officials have rightly noted, hoarding tactics — jumping into lines at the station to top off the tank, and filling up extra cans with gas — only made the shortage worse. Not to mention that lugging around multiple containers of gas poses a safety hazard.

And Georgia:

Both supply and demand are perpetuating the shortage. Refinery damage and power failures in Texas created the conditions, said Brandon Wright, a spokesman for the Petroleum Marketers Association of America, but drivers contributed by refueling more often than necessary.

“You hear stories about tankers pulling into gas stations and people are already waiting — and they have half a tank,” Dr. Medlock said. “It’s akin to hoarding.”

If only we had a system to discourage this kind of behavior, something that could take into consideration the supply of a product and insure it goes to those with the greatest need.

In fact, we have such a system, though politicians refuse to allow it to do its job without interference. If the market was left alone, the result would be less irrational and unnecessary hoarding, limited or no shortages, and far less hassle. We would all benefit if politicians would let the price system work.

Friday

21

December 2007

0

COMMENTS

Energy Bill Provides Neither Independence Nor Security

Written by , Posted in Energy and the Environment, Free Markets

President Bush (White House comments can be found here) recently signed into law the Energy Independence and Security Act of 2007. If we lived in a world where titles have meaning, this would be a positive occasion. Sadly, this bill provides neither security nor independence. Rather, it forces on consumers a product they do not want, subsidizes a number of pipe-dream “alternative fuel” projects that, if they were truly sources of potential fuel, would be funded by the market, and adds a $1.4 billion tax burden on businesses and workers.

Ranking member of the Environment and Public Works Committee, Senator James Inhofe, finds much to fault in this legislation:

“I simply could not support an ‘energy bill’ that will further drive up the already high price of gas at the pump or the cost of energy in our homes,” Senator Inhofe said. “Absent from this ‘energy’ bill are domestic energy resources – such as oil, natural gas, nuclear and clean coal technologies – that are essential to securing an American energy supply that is stable, diverse, and affordable.”

“Further, I am disappointed that this bill significantly increases the renewable fuels mandate in an irresponsible manner. Through my leadership position on the EPW Committee in 2005, I successfully worked with my colleagues to create a comprehensive program to increase the use of renewable fuels in a measured way that makes economic sense. This bill, however, contains a nearly five-fold expansion in the bio-fuels mandate. The fact is there are a growing number of questions surrounding ethanol’s effect on feed prices and our agricultural community, its economic sustainability, its transportation and infrastructure needs, and its water usage. As a result, I believe it’s just too early to significantly increase the mandate. The fuels industry needs more time to adapt and catch-up with the many developing challenges facing corn-based ethanol.”

“Unfortunately, this bill raises $1.4 billion by extending the ‘temporary’ Federal Unemployment Tax Act (FUTA) surtax on businesses which was first established in 1976 to repay loans from the federal unemployment trust fund. Even though this money was fully repaid in 1987, Congress has extended this temporary tax five times, imposing an annual $1.4 billion tax burden on America’s workers and employers.”

“This bill could have been even worse. Fortunately, however, I was able to work with my Senate colleagues to ensure major sections of the bill were stripped out. Democrat attempts to include a tax increase of $21 billion dollars, mostly aimed at the oil and natural gas industry, were defeated, as well as the attempt to include a Renewable Portfolio Standard that would have significantly increased the cost of electricity in Oklahoma and across the country.”

Representative Barton said this of the bill on the House floor:

Let’s take the issue of fuel economy standards. If there is a crown jewel in this bill, it apparently is that we’re going to raise CAFE standards significantly for the first time in 30 years. On the surface, that may appear to be a good thing, but let me point out a few things.

There are over 350 models of automobiles and trucks that are currently available for sale to the American public. There are only eight vehicles that get 35 miles to the gallon. They are the Honda Fit, the Honda Civic, the Honda Civic Hybrid, the Toyota Yaris, both manual and automatic, Toyota Corolla, Toyota Camry Hybrid, and the Toyota Prius. That’s it.

Now, let’s look at the top eight selling vehicles that the American public have bought so far this year. Number one is the Ford F-series pickup. Number two is the Chevrolet Silverado pickup. Number three is the Toyota Camry, not the Camry Hybrid. Number four is the Dodge Ram pickup. Number five is the Honda Accord. Number six is the Toyota Corolla. Number seven is the Honda Civic. Number eight is the Nissan Altima. Only two or three of those get 35 miles to the gallon.

I will stipulate, as smart as our engineers in Detroit are, it is going to be very, very difficult, if not impossible, for the Ford F-series pickups, the Chevy Silverado and the Dodge Ram pickup to get 35 miles to the gallon by the year 2020.

Of course you won’t have any Ford F-series pickups getting 35 MPG, nor do the bill’s proponents care. They don’t believe in choice and freedom. They’d mandate everyone putz around in a Prius if they didn’t have that pesky problem of elections to deal with. He goes on to say:

What the bill before us is is a mandatory conservation bill. Now, conservation in and of itself is a good thing. I won’t deny that. But conservation without some supply is a bad thing, and that’s what this bill is. We’re preempting State and local building codes with Federal building standards for so-called “green buildings.” We’re mandating 35 billion gallons of alternative fuels that right now the technology simply doesn’t exist. Hopefully our engineers and scientists can make that happen, but what if they don’t?

We are also basically just changing the way that we operate in a market economy for energy in this country to the government knows the best and the government is going to tell the American people what’s best for them, whether the American people like it or not. I think that’s a mistake, Mr. Speaker. And for that reason, I would hope we vote against the bill.

There is no energy independence in this bill. There is no exploration of domestic fuel sources that we can make substantial use of now or in the immediate future. There is no new call for nuclear power. There is absolutely nothing tangible in terms of new energy sources from this legislation. We cannot merely conserve our way into energy independence, not if we expect to grow our economy at the same time.

In addition to these issues, that old socialist boogey-man of “price gouging” is yet again attacked. According to Project Vote Smart the bill includes the following on “price gouging”:

– Establishes that in times of energy emergency as declared by the President, price gouging and market manipulation is prohibited and punishable by a civil penalty up to $1,000,000 fine or a criminal penalty of up to a $5,000,000 fine or up to 5 years in prison (Title 1(Subtitle B(Sec. 609))).

– Defines “price gouging” as charging an unconscionably excessive price charged by a supplier. Defines “unconscionably excessive price” as a price that has a gross disparity from the average price at which the item was offered for sale in the usual course of the supplier’s business prior to the President’s declaration of an energy emergency, a price that grossly exceeds the prices at which similar crude oil gasoline or petroleum that is obtainable from other purchasers, represents an unfair leverage on the part of the supplier, or if the price cannot be attributable to increased wholesale or operational costs (Title 1(Subtitle B(Sec. 602))).

I’ve written on price gouging before (here, here and here), but the sheer folly of this idea compels me to challenge it yet again.

Price gouging, the argument goes, is when evil business operators raise prices in the midst of some crisis, emergency or other sudden event. This takes advantage of consumer’s extraordinary need of some good and shouldn’t be allowed. Or should it?

Let’s put this another way and do a little economics 101. What purpose do prices serve? Prices are a means to signal where goods and resources should be utilized. Rather than having some central planner direct scarce resources, the price system (in conjunction with the profit motive) works to get the right amount of resources into the right places to satisfy consumer preferences. So, when demand for certain goods increases during an emergency, the subsequent rise in its price serves to signal the need for more of that resource in a given area. Removing these signals has consequences. Price controls enacted to prohibit “price gouging” exacerbate shortages.

Take for example the case of a Miami man who responded to a shortage of generators by traveling to North Carolina and returning with 35 generators much desired by the area struck by Hurricane Wilma. That’s 35 generators that would not have been available to the people of Miami had this man not acted. If government had its way, he never would have. Miami-Dade County sued him for “price-gouging”. Never mind the fact that any purchase is voluntary and that his customers obviously found his prices reasonable (the act of purchasing says so). Never mind that without being able to charge those prices he wouldn’t have spent his time and energy bringing those goods where they were needed. This is the folly of “price-gouging” legislation. It harms economic activity and thus does a disservice to those it claims to protect. One estimate finds that, had price controls such as those proposed by anti-price-gougers been in place following hurricanes Katrina and Rita, an additional $1.5-$2.9 billion in economic damage would have been caused.[1]

Though President Bush ignored their findings in signing this energy bill, the White House Council of Economic Advisers, finding that such a law “contradicts standard economic principles” and thus that “‘price gouging’ legislation should be opposed,” sternly warned against the consequences of such legislation just 6 months ago:

Such legislation is harmful for primarily two reasons:

* “Price gouging” legislation that effectively places controls on prices exacerbates shortages and potentially increases lines at gasoline stations.

* The difficulty in defining “price gouging” would create an unnecessary regulatory regime with potentially high litigation costs and great uncertainty for sellers, enforcement agencies, and the courts. These added costs and uncertainties would deter investment in new supply, increasing prices in the long run.

“Price gouging” legislation would reduce incentives to supply areas facing a fuel shortage. For example, in the days after natural disasters, such as hurricanes, price increases induce domestic refineries outside the affected region and foreign suppliers to rapidly ship additional gasoline to affected areas. If this legislation were implemented, it could deter retailers from increasing prices and it might not be worthwhile for suppliers to divert their shipments. Retailers in the affected region would have even less gasoline and drivers would face additional hardship. With gasoline prices kept below market levels, there would be shortages. Consumers would be forced to line up at gas stations, but gasoline would run out before satisfying demand and many would be forced to do without.

Without the flexibility for prices to increase, supply disruptions last longer than they would otherwise. By disrupting the price mechanism, price controls make lines longer during emergencies, misallocate the available supply, and prevent those with the greatest need for gasoline from getting access. Also, by making it illegal for prices to increase when supplies are tight, price gouging legislation makes retailers reluctant to lower prices when supplies are readily available, for fear of not being able to adjust to future supply changes.

The White Paper also notes that law already prevents anticompetitive behavior, and that firms may not use disasters as an opportunity to collude. Real price fluctuations, however, are to be expected following a disaster and serve a vital role. Politicians can make easy sound-bytes out of attacking such price spikes, but they do nothing but harm by attempting to legislate them out of existence. So not only does this bill provide nothing to help with energy independence, it provides real and tangible harm to the functioning of the economy.

[1]Montgomery, W. David, Robert A. Baron, and Mary K. Weisskopf. 2007. POTENTIAL EFFECTS OF PROPOSED PRICE GOUGING LEGISLATION ON THE COST AND SEVERITY OF GASOLINE SUPPLY INTERRUPTIONS. Journal of Competition Law and Economics 3, no. 3 (September 1): 357-397. http://jcle.oxfordjournals.org/cgi/content/abstract/3/3/357.

Wednesday

13

June 2007

0

COMMENTS

Eroding Freedom Should Never "Feel Good"

Written by , Posted in Energy and the Environment, Free Markets, Liberty & Limited Government

I’ve addressed the folly of “price gouging” legislation here enough already, but something in this article caught my eye. Though loaded with most of the usual nonsense, a particular statement stood out.

For the first time, it would be a federal crime to charge “unconscionably excessive” prices for petroleum products at the wholesale or retail level. Critics of the provisions, including the Bush administration, said the measure amounts to price regulation and could lead to supply shortages.

“The federal government has all the legal tools necessary to address price gouging,” said the White House.

The oil industry has repeatedly argued that many investigations have failed to uncover price fixing by oil companies. “If there is no manipulation, there should be no fear of a strong federal statute,” Cantwell countered at a news conference Tuesday.

Sen. Larry Craig, R-Idaho, called the price gouging provision “a feel-good vote” that he probably would support. “But does it bring gas prices down? Probably not,” he said.

And for whom does this vote “feel-good”? It shouldn’t feel good for anyone who believes in free enterprise. It shouldn’t feel good for anyone who believes in the fundamental principles this country was founded on. It might feel good for those who think the federal government should have the final say in everything, including the prices of our goods. So I’d expect it to feel great for a socialist, but it’s a sad state of affairs when such nonsense feels good to Senator and member of the supposedly free-market party. No wonder Republicans seem lost. No one has any principles any more; it’s all just “feelings”.

Thursday

24

May 2007

0

COMMENTS

Assault On Economic Liberty Passes House

Written by , Posted in Economics & the Economy, Free Markets

Almost the entire Democratic House majority, aided by 56 Republicans, passed a blatant assault on economic liberty in H.R. 1252: Federal Price Gouging Prevention Act. Price gouging is that terrible act of charging a price that the market will bear but that government or some other party judges to be “excessive”. Naturally, this attitude prevents the rapid influx of needed goods from arriving into disaster areas by prohibiting the market from providing incentives for the selling of these goods. The result is a prolonged period of shortages, but at least when you go to the store in search of needed supplies you can rest assured that, had they any in stock, you wouldn’t have paid too much for them.

This particular piece of legislation is aimed only at gasoline and petroleum products, but that provides little comfort. Price controls are never good policy, but when you elect a group of demagogues you get demagogic policy.

Tuesday

27

February 2007

0

COMMENTS

Rejecting Freedom…In Nevada?

Written by , Posted in Free Markets, Liberty & Limited Government

It’s a little weird to think of Nevada as a place to reject free behaviors that harm no one, but that is precisely what state Sen. Dina Titus is proposing to do with her quest to ban “price gouging”.

People like Mrs. Titus would argue that price gouging does harm people, but they are fundamentally wrong. The single most important concept behind any free trade is that everyone wins. If a person chooses to purchase a product, it is because they have decided it is to their advantage to do so. Only when they would not voluntarily purchase a product do they find it to be to their disadvantage to pay the cost of that item. Milton Friedman once said, “underlying most arguments against the free market is a lack of belief in freedom itself.” What Mrs. Titus is really objecting to is freedom. She does not want individuals to be free to choose when an item is worth its advertised cost to them and when it is not. What’s more, she is the one bringing harm upon consumers in her ill-conceived attempt to “protect” people.

[In an emergency], if ice prices rise to the market, the man who needs to keep his insulin cold for his diabetes treatment will place a higher value on it than the man who wants to keep his beer cold, and will have a better chance of getting it. The man who might rent two hotel rooms for his family for additional comfort might, in the face of appropriately higher prices, inconvenience himself and only get one, releasing one for another whole family.

Mrs. Titus can afford to harm these individuals in her populist chest-thumping attack on price gouging, because they’ll never know they’ve been harmed. When disaster strikes and there are no supplies, it will be the Mrs. Titus’ of the world that insure goods take longer to arrive than they otherwise would have, but no one will notice at the time that, if it weren’t for liberal meddling, they might have had crucial supplies a little bit sooner. Thus it usually goes when people try to step in and say they know better than the market.

Hat tip: Club for Growth