Russell Roberts (Cafe Hayek) has the quote of the day:
Listening to the President beg people not to drive while threatening 'gougers' sets back economic education in America 20 years. Or maybe it's 200. Having the Wall Street Journal (sr) write on Page 1, top story in "What's News" that "Katrina pushed the U.S. closer to a 1970s-style energy crisis" tells you how far we have to go. Or maybe the Journal is presciently anticipating price controls. The implicit price controls of Attorneys General threatening 'gougers' (defined as people who sell something at a price above what they paid for it) is already causing rationing, shortages and lines in some markets.
I started to discuss this in class today, and will continue with it next week. But here's a thought to chew on over the weekend.
As economists, we teach that the appropriate response in a case like this is to let the price rise. Because of the supply bottleneck with refineries off-line, there will be less gas in the short term. No way around that fact. If the price rises, people will modify their habits and the market can be in equilibrium, even if it's an equilibrium we don't happen to like.
Nonetheless, there one aspect of situations like this and that which happened on 9/11 that disturb me. There are cases of stations that spike their price way above the market price. From CNN:
Stations in the Atlanta region were charging as much as $5 a gallon, and one station in Stockbridge, Ga. was charging customers $5.87 a gallon. That led Georgia Governor Sonny Perdue to sign an order putting the state's price-gouging statute into play Thursday.
Let's be serious. $5.87 seems to be above the market equilibrium, even in these times. But I wouldn't prosecute them. Not at all. I'd just tell people not to go there! Find another station! If you're running on empty, just buy a gallon and drive on.
It has, on occasion, been suggested to me that the reason a station might set their price that high would be to promote panic, to get people thinking that it was going even higher. It's not a hypothesis that I dismiss out of hand. But even if it's true, it can be counteracted by some cool-headed thinking on the part of consumers. I'm a little shocked that consumers have been panicking about this. I understood it better on 9/11. Then, we didn't know if the next day would bring a new and different attack. This is a hurricane. It's gone--no longer a threat. There is no reason--none--for the market to respond to this in anything but an orderly fashion. We may not like paying a higher price, but there is no reason for panic, and no reason to pay close to $6/gallon. None.
If consumers were educated better about the supply and demand forces at work in this and other markets, the market might even work a little better because any suppliers who try to "gouge" (though I don't like the word) would find it utterly pointless. Ignore them; don't patronize them, and they will realize that they cannot mess with the market that way.
Any potential "gouging" going on is more a function of economic illiteracy than anything else. And it's bad because it stimulates bad behavior by policymakers. Extreme cases garner a lot of attention and turns the tide in favor of price controls, which would be a big mistake. The appropriate thing to do is to let prices rise and let consumers search for the best deal. Let the market deal with "gougers". The market is a hard master.
And by all means, if you are in college and haven't taken a basic economics course, run, don't walk, to the registrar and sign up now.
I see what you're saying, but take this scenario: two gas stations at one truck stop, 20 miles away from another stop. One raises gas to $5/gallon, and the other across the street sees that, and raises his to $5 too. Maybe they can get away with that for a few days before people catch on and they start losing money. I guess this might be covered in that industrial organization class I never took.
Anyway, I'm against price controls myself. I think as policy they're a bad thing because they mislead the public about the truth about markets, even if they "worked" in the short run. I just wanted to point out that not every market it is like the smooth equilibrium market in textbooks.
c.,
Information is the key. Let's take your example: a busy interstate (most truck stops are on interstate highways), two gas stations at this exit, nothing for 20 miles on the interstate. People just passing through probably have information about the prevailing price elsewhere. They won't stop at a place with such a high price. I doubt it would take a few days before they bring their prices back in line.
Now, let's take another example. Small town, several miles from any other gas stations. Not many people passing through with knowledge of prices in the next town. Could a gas station in that small town raise their prices above equilibrium? Yes. For longer than the station on the interstate? Probably. The difference? Information.
Why was there wide variation in prices on 9/11? Lack of information. But things calmed down considerably in 24 to 48 hours.
Except in the hurricane stricken area, the flow of information about gas prices and gas supplies should be pretty good right now. And the truth is, I would rather have the market help sort out the information, even if it means there are bumps in the road for a few hours or even a couple days after a shock. Indeed, if you don't have those bumps in the road, there's something wrong.
I'll go even further than your last sentence. NO market has the smooth equilibrium we find in the textbooks. None. One of the more glaring abstractions that the textbooks make is to assume perfect information. Imperfect information means that when there is a shock it might take a little longer to find the equilibrium. People will bid too high or ask too low. (Note that in one story I read recently, a gas station that was selling at below the prevailing price ran out of gas--what a shocker!)
But I would rather have that process play out. I'd rather have market forces push the bids and asks together than have the government try to figure it out. I guarantee that the government would do a worse job. (I question your statement about price controls working in the short run. Depends on what you mean by "worked," I guess.)
So don't get the idea that I think the market always works smoothly. No way. The market for gas can be as crazy as a bond pit. I tell my students that equilibrium is hard to pin down because supply and demand are constantly changing. And when you throw in imperfect information it really gets wild! That's why this stuff is so interesting... more interesting in real life than in the textbook version. But I really think that if more people understood the textbook version, not only would they be better off, but the market would function more smoothly on the margin.
Thanks for writing! I noticed you commented on one of my other posts and that you're an econ major. Always great to have econ majors visiting the blog!
One more thought. In my original post, I said there was no reason for the market to respond in anything but an "orderly fashion." I can see where that could be taken too literally. I don't mean that the market will snap instantly to the new equilibrium. What I did mean was that truly outrageous prices should not be observed for long; the high prices shouldn't be widespread; and consumers should be able to shop for the best deal as easily as they normally do.
For example, if one station raises their price a little bit for a while and people begin to shop elsewhere, that station will lower its price again. I'd still consider that an "orderly fashion."
If a station goes to $6 when the equilibrium is closer to $3 and people are still buying, that's not a very orderly response. That's more indicative of some sort of panic buying. This sort of thing happened on 9/11. There were isolated spots of panic and people ran to the AG afterwards.
What I was saying is that after a hurricane, I would not expect to see 9/11 style confusion about where the equilibrium might be. I would expect consumers to be less prone to panic, especially outside the hurricane area, and I would expect the response to be more orderly. (I think this is especially true given that we had a recent experience like this with 9/11.) But it seems like there were pockets of confusion. Much more confusion about why the price was going up and how much the price should go up than I would have expected.
That's all. Orderly is a relative term. And to be fair, the article didn't say how long the high price lasted or if there was any panic buying. So, to put it slightly differently, I simply see no reason for panic. None. That still leaves room for some variation and some fluctuation as the market searches for a price.
Thank god economists aren’t medical doctors.
http://guambatstew.blogspot.com/2005/09/doodoo-economics.html
In my section of the bay area prices become increasingly close as people become price sensitive.
For history it's amazing how many claim energy price controls and even/odd gas days came from Carter not Nixon.