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Today I want to talk about the myth of price gouging.
Price-gouging is generally defined as charging
a very high price, an inordinately high price, for
an item that previously was being sold for
some price that people considered normal. But really, price-gouging
is no different in its
operation than prices on any other market.
Price-gouging occurred during an emergency is usually defined as raising the price above
a certain percentage, let's say 10 percent,
during emergency or within 30 days of the emergency.
But, sellers are able to do this precisely because market conditions have
changed.
There's been a fall in the supply of the item,
during the emergency, and at the same time an increase by consumers
in demand. You have to ask yourself the following question,
if sellers suddenly had become greedy
why is it that they had become greedy overnight? Why didn't they try
to charge the high prices the day before?
Well, they would have all liked to have charged a higher price the day before,
but the market conditions were such that they were unable to.
So what they did simply was when the emergency hit
and market conditions change, they priced the according to those market conditions.
And it's also important to consider
that, in fact, it's not the seller himself ultimately
that is increasing the price, but other
consumers. So if you have to pay a higher price for a flashlight or a generator for
some emergency
the reason is that other people have increased their need for that
good and have sought to purchase that good at higher prices,
and were willing to pay those higher prices. That's precisely why the price
itself rose,
why the seller was able to raise the price. Let's take the example of Indiana
in the wake of these winter storms.
During the last half a year or so
the price of bulk propane gas, which is used by about 10 percent
of the households in Indiana, rose
double. From $2.50 per gallon to
$5.00 per gallon, and everyone admits that it was market forces. In
fact, the Attorney General of Indiana
pointed out that it was market forces that caused this doubling up in price.
On the one hand, you had an increase in
exports to foreign countries which diminished the supply and inventory,
and on the other hand, there was an increase in demand by midwestern farmers
who had a particularly wet
harvest for their corn and therefore needed more propane
to dry the corn. In any case the Attorney General went on to say, after
admitting that it was market forces that
drove this increase in price, that now that he had emergency powers
he would indeed look into violations of price gouging laws.
So here's one example in which
the politicians understand the driving force,
but, yet, are still going to prosecute.
In New Jersey something similar happened.
It was that widely admitted that there were very long lines during
hurricane sandy, some lines stretched for over one mile
to get gasoline.
Some gasoline stations had a closed because a lack of power so it left very few left
to service consumers. And these
stations naturally raised their price, as they saw the lines lengthening,
from around the national average of around $3.60 per gallon,
to around $4.00 per gallon. Now,
the AAA spokeswoman, who commented on the situation,
said well you know it's okay if they raised it to $3.67 or $3.70
that's understandable in this situation
and is justified by market forces. But $4.00
is outrageous, that's price-gouging! No, that's not price gouging, in fact
that is what is justified by the market conditions.
That is what causes people to conserve on the amount of gas they buy.
That'd they don't top of their gas tanks, they buy
less because of the high price and they'll leave more for others.
Or, they drive out of the area of emergency
into other areas where the prices lower. Beyond that, of course, is the supply side
effect.
In Indiana they did make a correct-
implement the correct policy; they
made easier for people to transport
propane to the propane customers in Indiana.
They did that by loosening restrictions on the number of hours
a transport driver's willing to drive. Were able to drive, rather.
But, on the other hand at the same time
they, as I said,
started to make noises about
looking into price-gouging. But the point is,
the reason why you loosen restrictions is to encourage supply.
To encourage supply from other areas of the country
where you don't have emergency conditions, where you don't have a greater
scarcity of propane gas, where propane gets-
has a lower price. So, the incentive is to move the gas from
from the areas with prices lower to Indiana where the prices are much higher.
So to sum up, price-gouging makes the very people
which it's designed to help, worse off. Those other consumers
in the affected areas- in the areas of emergency,
they're the ones who now find that
others have purchased more than they would have if the price had been
permitted to rise on the one hand,
and on the other hand that supply
is being suppressed by the fact that prices are kept low in that area.
If prices were allowed to rise, there would have been a greater supply
up to the area and it would have been a natural decline in prices.
The way to decrease prices during an emergency is to allow
prices to rise, drawing in supplies from areas
aplenty to areas where there's a greater scarcity.