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Source link: http://archive.mises.org/10181/for-every-gouger-a-hoarder/

For Every Gouger, a Hoarder

June 23, 2009 by

Art Carden’s great article on windfall profits brings up an issue that really gets under my skin. Carden notes, “People often point to the run-up in gas prices — some gas stations were charging over $3 a gallon — after the September 11 attacks as an example of firms enjoying windfall profits.” Ah, yes, the price gougers.

In the late morning and early afternoon of September 11, a few local gas station owners noted the increased demand for gas and raised their prices to near $5 per gallon. Folks still lined up at their pumps in order to top off gas tanks before the pending (it was supposed) gas shortage.

Meanwhile, I was stuck at work tending to my (for whatever reason, it was thought) essential job. From my vantage point, the lines in front of gas stations were the result of hoarding — those looking to purchase any remaining gas they could find.

I do not take issue with hoarders, especially those who paid the post-attack premium. But I took issue when some of those very same folks sought political action after the fact — when they appealed to the state attorney general for rebates (plus, fines and other threats of legal action).

Forgotten in all of this is the truth that the market will attempt to equilibrate supply and demand — likely preserving some fuel for those of us who could not spend hours in a gas line, thus directing gas to the most urgent needs.

Of course, today the market cannot equilibrate after a crisis. The press and political class vilified the gas station owners after September 11, accusing them of being evil capitalists seeking advantages over the distraught. Now, no station owner would dare raise prices, knowing that they would face certain action once things return to normal.

The winners in all of this: The politicians and rent-seekers – those seeking to hoard at pre-attack prices. The same winners in every crisis.

Note: Forgotten is the station owner who is out of luck, and out of business, once his gas is gone. He also needs to raise prices to protect his supply in the event that replacement fuel in not soon forthcoming.

{ 12 comments }

Don Lloyd June 23, 2009 at 10:04 pm

“Note: Also forgotten is the station owner who is out of luck, and out of business, once his gas is gone. He also needs to raise prices to protect his supply in the event that replacement fuel in not soon forthcoming.”

If a station owner intends to stay in business, then his expectation of the price that he will have to pay for his replacement fuel represents a floor on the price that he can logically charge now.

If he has 1000 gallons of gasoline left in his underground tank, he can either sell it now or hold it until his replacement fuel arrives.

If he sells it now, he will need to replace an additional 1000 gallons in the future at the future price. Thus any present sale below the future price will result in an economic loss, ecerything else being equal.

Effectively, his present stock must be minimally valued at its expected replacement cost.

Regards, Don

Jim Fedako June 23, 2009 at 10:27 pm

Don,

He can only sell his gas at the price the market will bear.

The issue I was obliquely noting is this: Gas stations exist on casual sales — Pepsi, chips, etc. Without gas, those sales are gone.

Interestingly, a local newspaper profiled a gas station operator during last year’s spike in gas prices. The station owner said that he couldn’t just lower his price below his competitor as he would soon be out of gas and out of the profitable casual sales.

Jam June 23, 2009 at 10:53 pm

The the gas pump rent-seeking has already borne rotten fruit.

If you recall over a year ago there were extreme gas shortages in part of the south-east. This was very localized and very unexpected. Almost immediately gas stations in and around the Charlotte area had NO gas at any price. None. I never saw a station that had raised their price more than 20 cents (this was when gas was already approaching $4 a gallon nationwide) and yet there were STILL accusations of gouging that the NC and SC Attorney Generals were moaning about.

If you wanted gas you just had to be damn lucky and find a station that just got a fresh supply (evident by the huge lines). During that week (yep, a whole week of this crap) I saw many a vehicle on the side of the road with no gas. I bet those guys would have gladly paid $10 a gallon if it meant they could get their vehicle home or to work.

Don Lloyd June 23, 2009 at 11:03 pm

Jim,

“He can only sell his gas at the price the market will bear.”

My point was that, (assuming a non-food station), he can’t sell below his expected replacement cost and sustain his business.

One difference between a member of the public or a journalist and an economist is that the first two look at accounting and sunk costs, while the economist must generally consider replacement costs.

Regards, Don

Shay June 23, 2009 at 11:06 pm

I bet those guys would have gladly paid $10 a gallon if it meant they could get their vehicle home or to work.

…and later complained about having to pay so much, not realizing that it would have been the high price that ensured there was any left for them to buy.

filc June 24, 2009 at 12:16 pm

Don,

I imagine the sales price of gas can fluctuate even marginally below the replacement value assuming the owners casual-sales are plentiful enough to subsidize his next load of fuel.

It’s true that if the Station Owner is smart, realizes there is a shortage in fuel, he will want to ration what little gas he has left. The tool he uses price adjustment. Higher prices means rationed fuel. He is better off if he raises his prices because his fuel will last longer. If the prices are too high he will sit on a full tank of fuel and no one will purchase. If prices are too low he will go empty and wait weeks for the next load. The pricing system is his underlying weapon to combat these situations.

By forcing him to keep prices low his gas becomes depleted prematurely. Not only does he suffer from not being able to sell gas but his real suffering comes into play when no one visits his store to buy everything else. Shortly after he shuts down for a week due to lack of customer interest in a store with no gas.

Chaos Motor June 24, 2009 at 2:21 pm

“He can only sell his gas at the price the market will bear.”

Certainly true, but isn’t it also true that the rate he will have to charge to obtain future fuel at future prices, and the rate the market will bear, will have to come to an equilibrium or else market activities will halt, leaving him with supply and others with demand, thus again creating pressure to equalize.

David Spellman June 24, 2009 at 4:30 pm

Government price gouging controls do help one type of entrepreneur: the black marketeer. The black market is where you can make truly obscene profits on small stock if you are willing to take risks.

In a free market, the profit margin is low because of competition. In a black market, you can get rich quick selling limited quantities. And if you are dealing with a product with reasonably inelastic demand (like gasoline, food, or recreational drugs), the sky is the limit for how much you can make.

The only way to improve on black marketing is to get the government to sanction your monopoly with laws and tariffs. Why fight the government when you can partner with the government?

Who says the customer is always right, or even that a customer has any rights?

Wade Flake Jr June 24, 2009 at 7:14 pm

I’m like everyone else, I want to purchase as low as possible. I have the choice to go where I want to when I do purchase. Having said that does not the station owner own the gas. Why can’t they sell at whatever price they can get? I don’t remember anyone calling the Attorney General and complaining about paying to little. I do remember the “gas wars”.
Is that not the “free market” ?
This is not the country my Father hit Omaha beach for. WHAT HAPPENED ?

tom June 24, 2009 at 8:50 pm

Additionally, in the Charleston, SC area, it is now illegal to raise prices on any goods immediately before a perceived Hurricane crisis. As a provider of goods and services in this area, I should be allowed to raise prices for the risk I assume for operating in this area; the Hurricane evacuation will disperse the consumer to other locals. It could destroy my physical plant, too. I should be able to price-in this risk, however acute.
Conversely, on the “fire-sale” of perishable goods, (frozen food for example) can I also appeal to the guv’ment for a rebate?
In the economic gas model, described above, the smart station manager might consider rationing (if legaly unable to raise prices), to preserve his gas supply and the on-going sale of convenience (casual) items.
Or he could quit and go on the dole…

tom June 24, 2009 at 8:51 pm

Additionally, in the Charleston, SC area, it is now illegal to raise prices on any goods immediately before a perceived Hurricane crisis. As a provider of goods and services in this area, I should be allowed to raise prices for the risk I assume for operating in this area; the Hurricane evacuation will disperse the consumer to other locals. It could destroy my physical plant, too. I should be able to price-in this risk, however acute.
Conversely, on the “fire-sale” of perishable goods, (frozen food for example) can I also appeal to the guv’ment for a rebate?
In the economic gas model, described above, the smart station manager might consider rationing (if legally unable to raise prices), to preserve his gas supply and the on-going sale of convenience (casual) items.
Or he could quit and go on the dole…

Robby June 24, 2009 at 11:26 pm

Our AG here in Tennessee is currently patting himself on the back for sticking it to the gas station owners who raised prices in last summer’s weather-induced supply crunch.

My thought on that approach is this: If I operated a gas station in Tennessee (which I don’t), I would now be on notice that there is nothing I can do to protect my business in the event of an emergency. Therefore, I must plan ahead. My prices for everything–the gas and the convenience sales–must rise as a means of saving up for a (literally) rainy day in case my fuel supply pipeline stops flowing like it did in 2008.

So I offer my thanks to our esteemed attorney general for policies that tend to raise my day-to-day expenses.

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