I went to 4 gas stations in metro Atlanta today before I found gas, and then I had to wait in line for more than an hour just to fill my tank up which got me thinking - why the hell is gas only $3.99 a gallon?!? As I sat there and watched frantic people fill their cars and sometimes even extra gas cans like gas was going out of style all I could think about was that the government was royally screwing this up (big surprise, eh?). What’s to blame though? Price gouging laws.
Price gouging laws were set up to keep businesses from profiting excessively in times of crisis at the expense of the people. And while I agree that jacking up the prices of food before a hurricane hits with no change in supply is a necessary law, gas shortages should be exempt. Yes, that means I do want to see higher gas prices when the pipelines dry up and the oil refineries are shut down. You see, the problem is that when supply is crippled and people start freaking out thinking that gas will never be available again, they all run to the pump and get as much gas as they can, especially when it's the same price as normal. That's why no one has any gas anymore.
Now what if we let the free market handle the situation instead of the government? Well, the reduction in supply would suggest that the price should go up; lets say for argument's sake that we have half the supply and the price doubles. Now, with gas at $8 a gallon, people start to change their actions. All of a sudden instead of filling up all their cars and rushing to the hardware store to buy all the 5-gallon gas cans they can get their hands on, and then filling those too, people get just as much gas as they need for the short term. At $8 a gallon, I would stop driving anywhere I didn't need to, and maybe I'd even take the abysmal public transport system. But one thing's for sure - my demand for gas would drop to only the bare necessities. Voila! No more gas shortage. Free market economics have successfully provided the most efficient allocation of resources, and the world is right again.
Some might say that gas doesn't work this way, however, and that it's demand is inelastic (doesn't change with price changes) but I say in short term crunches, a big enough jump in price would sufficiently change demand if the public feels that the price will come back down when the supply is back to normal and they'll be able to fill up at normal prices later. As for those "massive windfall profits" the gas station owners would make, well really they'll probably make the same amount of money that month, and if you're really concerned about them getting rich, then impose some sort of TEMPORARY windfall profits tax on them and use the proceeds to pay off some of the state's budget deficit.
Hopefully now you see why temporary price hikes in periods of supply shortage is a GOOD thing, and not some evil strategy for the rich to steal from the poor, or whatever load of malarkey the media is feeding you. Oh, and what about that bailout plan that failed and caused the largest single day drop in the DOW? We'll get on to that later...
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2 comments:
Why exempt food (or water)? The same reasoning holds, if people are paniced and food prices are locked to pre-panic levels, then people will stock up and hoard -- which leads to rules against hoarding, etc. In general, you let the market rule, or you have to have rules (aka, laws), and lot's of them to try and manage the situation. The problem is that the bureaucratics never get things right the 1st, 2nd, etc., time - so things fail while you're in the middle of the panic, and people suffer.
The only time that market rules should be suspended is when there isn't a market, i.e., when there are only 1 or 2 providers. In that situation you end up with a monopoly or duopoply and price fixing. Ok, maybe there's an exception for times of war, but chaos probably rules then.
Something to consider.
dxm08 - I absolutely agree with you. whenever there is a shortage of supply, the price should increase so as to most effectively allocate scarce resources. I do, however, agree with the law in that prices for goods should not be raised in ANTICIPATION of a shortage of supply - that is just taking advantage of people. I think you will find that 99% of the time the free market will provide the most effective solution. The problem comes with regulation, and even just the smallest amount can throw off a market and keep it from operating properly - as has occurred with the mortgage market right now.
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