"Gouging" is a destructive accusation - some economics for WTOP, AAA

July 4, 2012
By Peter Samuel

Indignation gets the adrenalin flowing, and of course it's not all bad. Indignation against injustice and other wrongs is what energizes people to make them right. But there's also a lot of misdirected indignation about imagined wrongs. And the term "price gouging" is the latter.

In its vilification of the free market, it is very destructive.

This week Andrew Mollenbeck of a DC radio station WTOP picked up on what he called "price gouging" in the wake of storms that have wrought havoc in parts of the Washington DC metro area.

Mollenbeck's report: "The air conditioning is out, the commute to work is blighted by dark traffic signals and there just aren't enough public outlets to re-charge the cell phone.

"But since the powerful storm last Friday, some have voiced complaints of a still-greater indignity: price gouging.

" 'We have received complaints about price gouging in the area of gasoline prices as well as in the area of hotels,' says Karen Straughn, the director of the mediation unit for the Maryland Attorney General's Office.

" 'We actually did get some that mentioned prices and how much they went up. It ranged anywhere from 25 cents to about 50 cents,' she says.

"The office has received about 10 formal complaints, citing locations in Beltsville, the College Park area and the Arundel Mills area.

"'It's unseemly, it's unconscionable and it's just not right,' says John Townsend, a spokesman for AAA Mid-Atlantic. END QUOTES

For Mollenbeck to face a higher price in time of trouble is apparently an "indignity."  And in the same vein for the AAA spokesman higher prices are unseemly, unconscionable, and wrong - and cause for even more indignation.

But why?

We need higher prices in times of shortages, and the recent storms created lots of shortages.  Some outages were the odd house here and there with a tree down on their building's service line in an area mostly powered. But other places there were large tracts or even suburbs without power for their refrigerators, cooling, lights and other electrical devices that we take for granted.

So people "ran out" as they say (drove) to rent generators, or buy ice. Or they found friends or relatives, still powered, that they could stay with a while. Or they shopped more frequently meal by meal in smaller amounts so food didn't spoil with the fridge dark. Or they flocked to restaurants, food places.

There were many reasons for a surge in driving and a sudden increase in the demand for gasoline.

Some without air-conditioning decided to book into a hotel where there was power and coolth. Some gasoline stations weren't working for lack of power to the pumps, the operating stations found demand surging, a spillover from those stations without power etc.

Gasoline stations and hotels are highly competitive. They set their prices to maximize their profit, always. It's the only way to remain viable businesses and ultimately to stay in business.

Hotels with spare rooms will offer discounts. With many spare rooms they'll offer deep discounts on their list prices. Or they announce 'specials.'

All that discounting goes away when they're filling up.

Gasoline station operators keep constant track of competitors' prices as shown on those large illuminated signs. The stations that are better located or have a preferred brand can price a little higher than others, 5c or 10c/gallon, but they can't afford to get too out of line. If their price is 15c or 20c higher than nearby stations they'll find they suddenly have few customers.

By the same token if they's 15c or 20c lower in price they'll find difficulty handling the crowd. There will be queueing at the pumps, and frustrated motorists waiting, waiting... to get to the pump at the head of the line.

Seeing in those lines the inefficiency of underpricing, and seeing also the opportunity to increase profit margins, the gas station operator will of course raise his prices and get them more in line with the competition's.

The hotel manager setting her room prices via 'discounts' from list, and the gas station operating setting his prices via signs and adjustment of the price at the pumps are both indifferent to what is causing the shortage or the surplus. They are always doing what's best for their bottom line.

As they should to have the market work for the social good.

Fearing the wrath of the AAA spokesman...

If business managers get worried about incurring the wrath of an indignation-mongering WTOP reporter or a AAA spokesman  and keep their prices low in the face of the higher demand after the storms, the result will be demand they can't handle. That will be waste in the form of long waits by customers, run-outs of gasoline, quick sellouts of all their rooms.

Higher prices will encourage only those who really need gasoline or really need that hotel room to buy that fuel now or take the room now. Motorists with sufficient fuel won't top up their tank with gasoline at prices seen as temporarily high. Some may defer less important trips to conserve fuel, so they don't have to buy gas when it's high. Higher hotel room prices likewise will deter some from booking in, making people work harder to find 'powered' friends who'll put them up. Again, price will help to keep some hotel rooms available that would be all 'taken' in the absense of a price rise.

Higher prices - "gouging" for the indignant - serve good social purposes of encouraging conservation, allocating limited supplies to those who value them most, and encouraging businesses to go to extraordinary lengths to enhance supplies. Gas stations had the incentive of higher demand and higher prices to get special deliveries of fuel, sometimes at short notice, or out of normal hours, or from further way. They'll work the phones and haggle in order to get the extra supply.

Sometimes they made an extra margin because the wholesaler wasn't asking more, but in other cases their costs were higher. For example their regular Baltimore supplier couldn't send an extra tanker load, but they got one from Wilmington DE, but only at 4c/gallon more.

Legislators smarter than reporters and spokesmen

Our legislators - in this case at least - are smarter than WTOP reporters and AAA spokesmen. They have not legislated against "price gouging" in emergencies even though it might win them some applause.

What would the law say: "No price may be raised during the period of a declared state of emergency"?

That of course would encourage price rises on the expectation of declaration of a state of emergency. It would cause prices to be raised prematurely just to have prices closer to market during the emergency. To the extent the price freeze was not anticipated it would generate all the waste of underpricing - runs-outs requiring more search for supplies, queueing. And it would undercut the businesses' incentive to take those extraordinary (and often expensive) measures to hustle up extra supplies to meet the demand of the emergency.

Emergencies are when we need the incentivizing and economizing powers of the free market most, and when misdirected indignation about "gouging" is most damaging.

Tolls

Tollers have an interest in better public understanding of economics, and the benefits of market driven prices.

Each peak period in many metro areas there is a kind of emergency and a mismatch between supply and demand for roadspace. Unless there is a higher price to curb the volume of vehicles, they inefficiently bunch up, hit their brakes and throughput drops - just when high throughput is most needed. The failure to harness the market to manage our urban roads is wasteful to the tune of tens of billions of dollars each year.

Dynamic pricing of roads in toll express lanes or differential peak/off-peak tolls at bridges can be attacked by the demagogues or indignation-mongers as "price gouging" - as taking advantage of a shortage. And it is exactly that. Because that's how businesses and markets work their magic - by using price and responding to shortages or surpluses.

People accept it when its value is properly explained, and when they think about the alternative - editor.

CREDIT: pictures from Politico, CNN, Washington Post. Also we picked up on a point made by Donald Boudreaux, economist at George Mason University in a posting on his excellent Cafe Hayek site.

see http://cafehayek.com/

http://cafehayek.com/2012/07/prices-and-reality.html

PERSONAL: we got off lightly here in the city of Frederick. A handful of people lost power when trees or tree limbs came down on the service lines between the street pole and the house. Many street lights were out. And at the height of the amazing thunderstorm power went off for seconds about three times throughout the city - apparently when wind blows high voltage cables against one another momentarily. But the city had power when the T-storm was over.

But the outside the city many more people were without power for days. In neighboring Montgomery and Howard counties whole swathes of suburbia were in the dark for days - estimates 2 million people.

It makes you think we need a serious national discussion of limiting outages in future storms (and Islamist attacks.) I hate the trashy look of overhead cabling and poles. There's an aesthetic case alone, in my opinion, for undergrounding of electric and telecom cables and it would obviously reduce storm damage, and vulnerability to enemy attack too. And backup generators onsite?

TOLLROADSnews 2012-07-04


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