Test Questions on "Price Gouging"
Just like clockwork: first the natural disaster (Andrew, Hugo, or in this case, Charley) or major event (Super Bowl, Sugar Bowl, World Series), then the usual nonsense about the evils of price gouging. Fortunately, yesterday's Daily Article provides a potent antidote (Don Boudreaux has an excellent post at Cafe Hayek).
The furor over "price gouging" is enough to make economists want to cry, but it's a good "teaching moment:" the anti-price gouging hysteria teaches us one of the most fundamental principles of economics. Specifically, interfering with market prices invariably produces the exact opposite of what the well-intentioned price-setter wishes to achieve. Price controls generate shortages and unlawful behavior. As much as we might chafe at the thought of someone charging $10 for a bag of ice, changes in relative prices send important signals to consumers (in this case, conserve scarce resources) and to producers (again in this case, produce more milk, ice, and plywood for the Florida market).
Below are some questions from old exams dealing with price controls, adapted from chapters 5 & 6 of Heyne, Boettke, and Prychitko's The Economic Way of Thinking and, in some cases, taken from the pages of the Birmingham News and the Washington University Student Life.
Talladega Superspeedway, which holds almost 200,000 spectators, is in the tiny town of Talladega, Alabama.
(3 points) On the weekend of the big race, hotel rooms in Talladega rent for $300 per night. On non-race weekends, they rent for $50 per night. Why?
(4 points) What happens if the Talladega City Council imposes an “anti-gouging” ordinance that caps the price of rooms at $50 per night?
A tornado blows through Saint Louis and destroys windows throughout the city, causing the price of new windows to skyrocket. A coalition of community leaders has asked that the city place a price cap on new windows because, in the words of the coalition, “they shouldn’t be allowed to charge more than their costs.” Using what you’ve learned this semester, answer the following:
a. Why are window makers likely to raise their prices?
b. What concept of “costs” does the coalition have in mind?
c. How will rising prices actually make more windows available to the community?
d. What might local window makers do to increase prices without angering the coalition?
Suppose the Super Bowl will be held in Saint Louis this season. Use appropriate diagrams to answer the following (5 points each, 25 points total).
a. On the weekend of the big game, people expect hotel rooms in Saint Louis to rent for $500 per night. On non-game weekends, they rent for $100 per night. Why?
b. What will happen to the availability of hotel rooms if the St. Louis City Council imposes an “anti-gouging” ordinance that caps the price of rooms at $100 per night?
c. Does this make people better off or worse off? Why or why not?
d. How might hotel owners and hotel buyers fix the problem the ordinance causes?
e. How might other St. Louisans help solve the problem?
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People who oppose "price-gouging" never explain how supply of essential commodities can be increased if lower price is encouraged or enforced. Read More
A bunch of blogs had some very good price gouging threads after Hurricane Charley... There was one small omission, however, upon which I commented in the H&R thread. Here it is... Read More
Comments (10)
Regarding "Price Gouging Saves Lives", it is the same socialist mentality that begs for government "services" who shriek when prices "go out of whack". The state is quick to punish price gougers, but an astute free-marketeer could purchase the ten-lot of ice bags for $4.39, carry them outside and resell them for the street price of $15.00. Until we are rid of government controls, we can still operate in a free market by being nimble enough to capitalize on the inefficiencies created by state meddling.
Published: August 18, 2004 2:51 PM
The article on price gouging was good in that it discusses the ills of government control over economies and personal property. It also, accurately describes the laws of supply and demand. What it does not address is charity and responsibility. The main concern in the article seems to be to monetary profit and only then, by the laws of economics everyone is better off and lives saved.
Charity is the responsibilty of the individual not government. The store owner should be free to charge whatever he deems appropriate or profitable. However, in the end, I contend that the store owner and economic community will profit more by the owner, at his own discretion providing ice at a low price and self-rationing to those he believes need it the most than he will by increasing prices to gain an immediate monetary benefit.
The possible rewards for such action are economic and spiritual, the latter ultimately being more important in my opinion, although I am a fan of money. The economic rewards will not be immediate, but the community at large will remember who was charitable. They will later return to spend their dollars at his store rather than to those which decided to raise their prices. The spiritual rewards may not be immediate either, but God has given us the responsibility to take care of those in need and we will be judged accordingly.
Chad Bull
jprcc.org(Link)
Published: August 19, 2004 10:26 AM
Comment on Chad Bull's comment:
Is not the storeowner, by using his discretion conserning charitability, acting not only in his own charitable self-interest, but also unilaterally acting in the interest (or lack thereof) of others? If he gave one of ten $10 bags of ice away to what he deemed to be a charitable case, did he not charge the other nine customers $1 more that he otherwise could have? And in so doing, didn't he act as their agent of charity without their consent? When he publicizes his act of charity to his clientele, some of whom will be the $10 ice customers, won't they harbor at least a tinge of disgust that he acted in this charitable fashing without their consent (even though they may agree with his selection of a reipient?) Won't that tinge be further aggravated by the fact that the storeowner himself may not have contributed one-thin-dime to the cause"? I hardly think this would stimulate economic rewards for him from those other nine customers (and perhaps not from non-ice customers as well).
Don't emergency situations require that all agents do their jobs well? Isn't it the storeowner's primary responsibility to provide goods at the lowest possible price (contextually speaking, of course, . . . including the law of supply and demand)? (Acting as an agent of charity for others, consented or otherwise, is not his major function, least of all in an emergency. There are many other concerns better suited to this specialized service.) Just where in this is "spirituality", as you implied it, involved? Should a hard line be drewn between profit motive and spirituality? Aren't there 'unintended consequences' of doing so? Wouldn't any God worth his salt be perturbed for cultivating such 'unintended consequences?
Published: August 20, 2004 1:27 AM
Bob Black: "Is not the storeowner, by using his discretion conserning charitability, acting not only in his own charitable self-interest, but also unilaterally acting in the interest (or lack thereof) of others? If he gave one of ten $10 bags of ice away to what he deemed to be a charitable case, did he not charge the other nine customers $1 more that he otherwise could have? And in so doing, didn't he act as their agent of charity without their consent?"
He can't charge his other customers more than they consent to. An act of charity is independent of the other transactions. Could he give every fifth customer $1,000,000 and charge the other nine $250,000 than they would otherwise pay for the water?
Oh, and the lowest price he "could have" charged is zero. He's already bought the water. What he chooses to charge is what the market can bear, and that is independent of his expenses. Whether he makes a profit or loss is not, of course.
Published: August 20, 2004 10:52 AM
Thank you David Brown for echoing my thoughts on this issue. I want to cringe when I hear talking heads, even those calling themselves conservative, pompously denounce evil price gougers.
The price gouger did not create the scarcity; that is a given of the situation. He only offers something for a price, which the customer may refuse.
If it is immoral for local businesses to jack up their prices in response to sudden scarcity, then it is more immoral for attorneys general and journalists at their comfortable distance from ground zero not to drop everything in their lives, pay their own way to the scene and provide the same goods and services to the market at or below the price that prevailed before the disaster.
Moral Pretender, heal thyself!
Published: August 20, 2004 2:56 PM
If you read my earlier comments again, you'll note that I never mentioned an evil price gouger or judged anyone immoral. I never mentioned advertising ones actions either. I said that the store owner should be free to do as he wishes and then simply presented what I think the economic and spiritual consequences of ones particular actions could be in a particular situation. The outcomes are "obviously" individually based, as are the actions of the store owner. Everyone has to make individual decisions, economic or otherwise, on what is right and wrong based on his circumstances and moral suppositions. Their is right and wrong, however, and we will be held accountable for our actions or lack there of. This last statement may infuriate some, but this is understandable. I think the real issue with my earlier comments, based on some responses, is that I mentioned God and responsibility.
Chad Bull (Link)
Published: August 21, 2004 1:57 PM
Price Gouging is wrong in my book because in a time of need you should be helping people not charging 800 dollars for a generator that is worth 500. I mean it is wrong for companies to do that. The prices of generators sky rocketed during Charley. My parents bought a generator and it nearly cost us 850 dollars. That is merely ridiculous.
Published: November 18, 2004 6:19 PM
From Kamaria:
"Price Gouging is wrong in my book because in a time of need you should be helping people not charging 800 dollars for a generator that is worth 500. I mean it is wrong for companies to do that. The prices of generators sky rocketed during Charley. My parents bought a generator and it nearly cost us 850 dollars. That is merely ridiculous."
Firms do not set prices, consumers ultimately do. The firms just produce the products. With price controls your family probably would not have had a generator to buy at all, because they would have all been sold out by the time you got to the store. Therefore, price controls do nothing to help in a time of crisis, they only cause shortages. Additionally, nobody should be forced to sell their property at a "fair" price (whatever that is), they should be allowed to sell it at whatever price they want.
Published: November 18, 2004 7:06 PM
This is an important point. Too many people don't seem to understand economic consequences. With price controls forcing businesses to sell below the market price, some people would inevitably have to do without the good or service. This is not the intent of the price controls, but it is definitely the result.
Kamaria thinks her family shouldn't have had to pay $850 for a generator that was "worth" $500. Obviously, if they didn't think that it was worth $850, under the circumstances, they wouldn't have been willing to pay $850. It was the change in circumstances that raised the value of generators for a while.
The unhindered market process ensures that generators would go to those with the most pressing need, and not to less important or trivial needs.
Published: November 19, 2004 1:56 PM
That $850 generator was probably not taken from the store inventory that was already on hand. It was probably pulled out of another store's inventory, or intercepted somewhere in transit to a different store, or it was new-made at the factory by putting on special overtime shifts. The store where you bought the generator might have had to pay its employees a lot more than usual, in order to entice them away from cleaning/repairing their own home, or to keep them from getting jobs doing emergency cleanup or reconstruction somewhere else. Maybe the store had to run generators, hire repairmen, and take other costly measures simply to stay open and offer generators for sale.
You might expect one or two people to pull together and do charitible things in an emergency, but to expect a long chain of manufacturers, truckers, wholesalers, repairmen, store owners, clerks, etc. to all make an extraordinary effort to deliver generators to you at the old price, is not reasonable.
Published: November 19, 2004 3:45 PM