3.9.05

PROFITEERING, OR CONSERVING? What is price gouging? Rand Simberg notes the propensity of legislators to conduct experiments against reality.
Imagine the headlines, "Legislature Mandates Pi To Equal 3.00000 -- Some Analysts Warn Move May Spur Engineering Problems," or "King Canute Command Tide To Recede -- Some Analysts Warn Move May Spur Wet Footwear Problems." What would we think of the analysts who thought that the proposed mandates were no problem, perfectly in consonance with the laws of physics and human nature? Even most people with typical journalism educations would recognize such heads and subheads as the jokes they are, but somehow when it comes to basic economics, the laws of supply and demand, and the function of prices in a market economy bizarrely remain subjects for public debate.
(As a footnote, early in this century the Indiana House attempted to define pi as 22/7, a figure close enough to the true, if transcendental value, for much engineering work. A legislator also proposed to introduce a formula for squaring the circle into the curriculum -- and you thought you had trouble with the intelligent design crowd. A mathematics professor at Indiana U. spoke with his state senator -- there might be wisdom in specifying bicameral legislatures -- and spared the state the embarrassment of making such outlandish statements in public. But I digress.)

Back to Mr Simberg:

Let's recap, briefly, for those who never took the class, or have forgotten it. It's really simple. In any locality, when the supply of a particular item is reduced with no change in demand, or the demand for it increased with no change in supply, or supply is decreased with a demand increase, prices will go up.

This is a signal to the market. To those demanding the product, it is a signal that the supply is relatively short, and that they should perhaps rethink the level of their demand, if possible. To the suppliers, it is a signal that more of the resources must be brought to market. In both cases, it will result in a change in behavior on both parties that will restore the balance between supply and demand. Moreover, it does so in a useful, quantitative way. It tells the supplier how much expense, risk and effort she should expend to increase the supply. This calculation may even bring new suppliers into the market. It also indicates the degree to which it is sensible for the consumer to change their demand. When by fiat we pretend that the price has not gone up, it's like covering up the signposts, and we shouldn't be surprised when those supplying no longer attempt to increase the supply, and those demanding can't be bothered to reduce their usage of that particular commodity.

Then head on over to William Polley.

Any potential "gouging" going on is more a function of economic illiteracy than anything else. And it's bad because it stimulates bad behavior by policymakers. Extreme cases garner a lot of attention and turns the tide in favor of price controls, which would be a big mistake. The appropriate thing to do is to let prices rise and let consumers search for the best deal. Let the market deal with "gougers". The market is a hard master.

And by all means, if you are in college and haven't taken a basic economics course, run, don't walk, to the registrar and sign up now.

(He's at Western Illinois. His department's budget reflects enrollments, as does ours.)

La Profesora Abstraida links to an executive order from Georgia Governor Sonny "Son of Canute" Perdue cautioning retailers against price gouging. It looks like a reasonable request.
For example, a retailer may increase the price of their products as is necessary to replenish their existing daily stock at current market rates, maintaining the same markup percentage he or she applied prior to the enactment of the price gouging statute.
The devil is in that "markup percentage." There are conditions on the elasticities of supply, demand and resource supplies sufficient to ensure that the equilibrium retail price maintains a constant ratio to the wholesale price of a single input. Those sufficient conditions are unlikely to hold in the presence of at the moment inelastic supplies of gasoline, particularly summer grades in ozone-impact areas, and relatively inelastic demands for gasoline. (Each of you may thank me for doing my part to not bid the prices higher. The weather has been quite conducive to bike commuting to work.)

No comments: