Thursday, June 04, 2009

Your Government at Work

Consider two gas stations.

One gas station charges the same price, or a slightly lower price, as the others around it. Let's say the price is $4.39. They run out of gas pretty quickly, because there is a shortage. Then, they close, and put up signs, "No Gas! Closed!" Cars that pull up to the pumps are faced with a gas price of infinity, even if they only need a gallon or two to continue their journey.

Gas station number two charges the market price, a high price implied by the gasoline shortage. So, they are charging $6.21 per gallon. They remain open, still paying their workers, and providing gas, milk, and other necessities to the community. There is no other gas station in the area open. People pull up all night, buying just 3 or 4 gallons, enough to ensure their mobility and safety until the gas shortage passes, in a week or so.

Which gas station is providing the greater service? The difference in revenue, for such a short period, is pretty trivial. But the difference in service is enormous. Gas station 1 is charging an infinite price, and gas station 2 is charging an actual price, for actual gas.

So, the half-wits at the NC Attorney General's office...go after gas station #2! Arrest them! Prevent them from selling that gas that people need!

Remember, the only way that the above scenario could possibly be true is if there is a severe shortage. If you charge the below market price, you will run out, for sure. Why is running out of gas, and closing, noble?

And, without a shortage, no one would ever pay the $6.21 price. Gas stations ALWAYS charge the maximum price they can get from consumers. It's a business, not a charity.

Further, remember that (1) price fixing is a crime, and there is zero evidence, and in fact no charges, of price fixing. The only crime here is charging the market price, the one that ensures that people who need gas can actually get it. And (2) the price gouging itself, as I have argued elsewhere, is the CAUSE of the shortage. The law is the problem, not the solution. Without the price gouging law, NC would have had plenty of gas, though at a higher price (still less than the infinite price implied by a gas station that is CLOSED, however.)

Here's the cool thing: Roy Cooper, AG of NC, made an announcement:

Gas price-gouging probe nets $56,000
RALEIGH -- North Carolina's attorney general says his office has gotten more than $56,000 in refunds, civil penalties and energy assistance funds from gasoline price gouging investigations.
Attorney General Roy Cooper said Wednesday in a statement that the results show "we won't tolerate those who try to make an unfair profit off of a disaster."
Cooper was one of the attorneys general who began investigations in the fall after Hurricane Ike hit the Texas coast and gasoline prices began to rise.
Cooper's office said thousands of consumers complained after the state price gouging law was triggered.
His lawyers still have civil lawsuits pending against two gas stations.
Some stations charged more than $5.49 a gallon.

Wow! They "netted" $56,000. Since "net" means revenues in excess of costs, they must have collected a lot, right? 4 lawyers, and numerous assistants, plus police, working on these cases for more than six months? Oh, wait, the $56k is actually the gross amount collected. The "net" is more like a $200,000 loss, when you account for the costs of those lawyers and bureaucrats beavering away at punishing those gas stations that had the audacity to remain open and sell the gas that people needed. (Sounds like Roy Cooper knows just exactly what the facts is. The problem is that he makes his living off of the people's taxes.)

I remember when this was going on, in September, in NC. I got a call from a reporter, in Charlotte. He asked if I still thought that the price-gouging law was a bad idea, given all the high prices. I said, "Wait a week. Because of the price gouging law, you are going to be unable to buy gas in Charlotte. The price gouging law is going to cause a shortage."

The following Monday, he called back. "How did you know? Gas stations are closed, all over the place. Charlotte is out of gas!"

Gee, bud. I guess I am a genius. Or else I have taken an intro level econ class at some point. Because even an intro level course will teach you that "price gouging" laws don't prevent shortages, they CAUSE shortages.


Jeff said...

Wait, if the level of demand is much higher than the supply of gas, wouldn't some stations run out of gas anyway? Competitive pressures would keep the prices lower even without the law, at least until some competitors start running out and the ones with gas remaining start raising prices, right?

Anonymous said...

In this case, I don't think your comments make a lot of sense.

The gas station that provides the best service is the one that continues charging prior market rates and imposes an X-gallon limit on purchases.

As well, I really don't think it would have helped a gas shortage very much owing to the web of contractual relationships between the gas stations and the refiners/national chains. A local Mobil station can't just buy some gas from some dudes who show up towing a makeshift gas tank.

It would, in any case, be absolutely trivial to write price gouging legislation that allowed people actually bringing in new supplies to charge whatever they wished while prohibiting firms from selling pre-existing stock at very high prices, which is after all just a simple transfer. NC's doesn't, but that's a problem with that particular gouging law, not with the platonic form of gouging laws.

Anonymous said...

Again Mike you let extreme market economics cloud your judgement. Some price gouging occured - because they are businesses and not charities (as you pointed out). Well as businesses they gouged because they could. Not a public service. Yes some people could pay more but not everyone has a 6 figure salary like you.

T.Lord said...

Anonymous --

What if it was diamonds? If by some fluke, all the diamonds in the world except for the ones in Freeway Cash & Pawn north of Seattle just disappear in a one-time event (cosmic rays at work), do you think the ones at Freeway Cash & Pawn would cost the same as before the disappearance?

Back to gas: Let's say you had two tanks in the ground at Claire's Gasoline and Bagels (a very small chain, you may not have heard of it). One of them was filled, just before last night's Big Crisis, with delicious grade AA gasoline, which was purchased at then-prevailing wholesale rates, and priced at the then-prevailing retail price. Big Crisis destroyed some refineries, caused a tanker ship to founder in transit, and wrecked half the fleet of the delivery trucks; the price of gas in world markets leapt. The other tank is empty, and due to be filled this morning -- one of the surviving delivery trucks is on the way right now from the refinery with enough gas to fill it, at what will be a much higher price per gallon than yesterday's delivery.

If you owned the station, would you sell the existing stock (in the filled tank) at the price it was sold at last night, when everything seemed hunky dory, even though there are people lined up to buy it and evidently willing to pay even more?

What about the new gasoline?

What if each tank was half-full, then topped up to full by the delivery truck -- would you then lower a running blender into the mix of Old and New to mix it up, then sell it for an average of old price and new price? What if someone happened to get (through peculiar molecular motion) a whole tank of old gas from this mixture, and there was some way for you to know this -- would you charge them the price of Old Stock gas, since that's what they got?

My point: Prices aren't tied to atoms with tiny price tags! They're based on current perceived value. Another way to think of it: gasoline is psychic, quantum entangled, etc -- old gasoline (not *too* old to the point that it's actually degraded, but, let's say 2 days old or some other arbitrary age) gets some spooky action at a distance. The new market price is what the station suddenly has to take into account. They have to pay for the new deliveries, after all, and a lot of the money they'll need to pay for new gas comes from selling the old gas. The old gas, realizing this, isn't going to be upstaged by the new "more valuable" upstart-carpetbagger gas, and quickly puffs out its chest to say "I'm worth just as much to the motorists -- Give me a chance, I know I can prove myself at the new price per gallon!"

T. Lord