THE OTHER DAY, while perversely listening to Air America, conservative little me, I tried
to think of something they and I could agree on. My thought: price gouging; now that’s
something we certainly could all agree on — except for maybe me. I’m for it. It’s called
free enterprise.
As for price gouging, actually, I would say there is really no such thing — only
something maligned as that. Unless “price gouging” includes a loaded gun or its
functional equivalent (e.g., the power of government), no one makes anyone else pay
an inflated price for anything. I do not see how any market transaction which occurs
without compulsion can be said to be one party “gouging” another.
Still, price gouging — charging unreasonably excessive prices in times of crisis —
violates North Carolina General Statute 75-38, which comes into effect when a disaster,
an emergency or an abnormal market disruption for critical goods and services is
declared by the governor.
On September 12, North Carolina’s law against price gouging was triggered by the
declaration of an abnormal market disruption due to Hurricane Ike.
So, North Carolina has in effect a price-gouging law — and right now has the highest
prices for gasoline in the lower 48 states. North Carolina has a price-gouging law —
and had gasoline shortages as a result of Hurricane Ike, which hit Galveston on
September 12, that lasted at least until as late as October 9.
How did we end up with both shortages and “high” (in quotes) prices for a commodity
that was not generally scarce? I have an answer. (And it’s not price gouging.)
The first answer is, of course, Hurricane Ike which shut down oil refineries in the Gulf of
Mexico — meaning for a while very little gasoline was sent into pipelines serving the
East Coast.
My next answer is the anti-price-gouging law.
Prices, especially price-gouging prices, are both signals and motivators. When
shortages come, and prices are allowed to freely rise, they will signal need and provide
the impetus for greed to meet need. And it works.
But here’s what happens when sellers are not allowed to “gouge” consumers at a time
when supply is constricted: the consumers, when they see the possibility of shortages,
act in their own self interest. In case of gasoline, they fill up their tanks, even when
their tanks are only half empty. With little real cost to the consumer, why shouldn’t
they?
And what happens is a self-fulfilling prophecy. Even if no real shortage was coming, it
will now. And if there were real supply problems, as there were following Hurricane Ike,
the shortages are magnified and extended — and prices drops that were to come, come
later and slower.
“Economically, the way you get people to buy less is to have the price go up,” said
Michael Walden, an economics professor at N.C. State University, in an article in the
Winston-Salem Journal on September 12.
“You can appeal to them, and say, ‘Please buy less,’ but most people will buy more,”
said Walden. Further, according to Walden, it is not good business for retailers to let
their tanks run dry. “Retailers want to have gas available,” he said. “They want to be
able to stay open.” A closed gas station doesn’t make money.
So, what happened? Weeks after Hurricane Ike disrupted oil production, a gasoline
shortage continued in parts of North Carolina. Asheville city officials closed offices, the
civic center and all parks and recreation centers because of the shortage. Even the
local community college was closed for several days.
Further, the cost to the community was likely quite substantial in its impact on
business, especially tourism.
The immutable law of supply and demand may be opposed only at great peril to those
who attempt to revoke it
With anti-price-gouging laws in effect, the market mechanism of price and profit were
not harnessed. The individual entrepreneur, say an independent gasoline truck driver,
perhaps several states away, who reads of the crisis and who could bring a tanker full
to the area to profit from our crisis, will not act.
The typical gasoline tanker truck holds about 9000 gallons. Think about this, if a
trucker could make an extra dollar a gallon, he could make $9000 for a single tank full.
How far would he be willing to drive? From Missouri, from Massachusetts, from
California?
Shortages are the Siamese twins of price controls. Free markets bring resources to
needs; price and profit are the mechanisms. Ironically, high prices often bring low
prices.
What would happen if too many greedy truckers bring gasoline here to exploit us poor
North Carolinians? We would have a glut. And the price would fall below even what it
was before the shortage. And, just like my Air America friends hoped, the greedy guys
would lose money. It’s a nice system, ain’t it?
North Carolina should try it sometime.
Gary D. Gaddy is not a economist — but does read the British publication named “The
Economist” every week, which periodical strangely calls itself a “newspaper” but comes
in magazine format.
A version of this story was published in the Chapel Hill Herald on Thursday October 23,
2008.
Copyright 2008 Gary D. Gaddy
garygaddy.com 