Thursday, September 01, 2005
In Defense of Price Gauging
I highly recommend reading this.
I highly recommend reading this.
To review a little bit of basic economics as we like to do from time to time: prices are not (as many popularly imagine them) tools by which the producers of goods and services exploit and "stick it to the little guy." They are a way of allocating resources. Prices reflect the demand for a particular product relative to the supply (or perceived supply) of it.
Currently, gas prices are rising quickly. Why? Because the demand is the same as it has always been (or perhaps even rising), but the supply has been reduced. Even more importantly, people perceive that there is a gas shortage, which makes them want to get it as quickly as they can. Though higher gas prices don't thrill me either, they serve a purpose in this situation. If people are going to buy gasoline now, they have to do some prioritizing. They have to decide if they want to spend their $3 on a gallon of gas, or if at that price it would be better spent on something else. These are the decisions the market is designed to force in order to keep resources available to those who want them most.
When prices are not allowed to rise to naturally reflect the market, people (recognizing a bargain when they see one) will begin to hoard things because they don't have to make those choices. The artificially cheap price suddenly looks so good that people will even buy extra "just in case."
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yeah, i'm sure that's exactly what the gas companies had in mind....how silly of me to think otherwise...
chris
chris
# posted by 
: 4:08 PM
: 4:08 PM
Geoff:
Your comment only represents a small part of microeconomics. I actually wrote a bit on this a few days back. The term free market is non-specific and doesn't exclude the ideas of price ceilings and floors. The issue has less to do with artificial demand spikes and hoarding as it does with the lack of alternatives to fuel and the suppliers' understanding of that fact.
Hwang
Your comment only represents a small part of microeconomics. I actually wrote a bit on this a few days back. The term free market is non-specific and doesn't exclude the ideas of price ceilings and floors. The issue has less to do with artificial demand spikes and hoarding as it does with the lack of alternatives to fuel and the suppliers' understanding of that fact.
Hwang
# posted by : 1:11 PM
: 1:11 PM
No, Chris, the gas company has it's own self-interest in mind. As does the consumer. That's how the free market works, and that's why it works. Where it breaks down is when people naively (and against all that is known about human nature) think that people are all suddenly going to start to act in altruistic benevolence.
The beauty of the free market is that bad motives don't really matter. The market still works to allocate resources just like I've said. If the supplier raises the price too high for his item, nobody will buy it. But there's nothing wrong with him charging what people are willing to pay. That's how goods and services get best distributed.
Only children (and liberals) have some idealistic, platonic notion of how much somthing should cost. When my children were small, they insisted that ice cream should only cost a dime. But the darned ice cream company still insisted on charging what it could for ice cream, rather than what my children wished they could pay for it.
But my children grew out of such ignorance. That's the difference between them and liberals who rail about the "evil oil companies" and such.
The beauty of the free market is that bad motives don't really matter. The market still works to allocate resources just like I've said. If the supplier raises the price too high for his item, nobody will buy it. But there's nothing wrong with him charging what people are willing to pay. That's how goods and services get best distributed.
Only children (and liberals) have some idealistic, platonic notion of how much somthing should cost. When my children were small, they insisted that ice cream should only cost a dime. But the darned ice cream company still insisted on charging what it could for ice cream, rather than what my children wished they could pay for it.
But my children grew out of such ignorance. That's the difference between them and liberals who rail about the "evil oil companies" and such.
Hwang,
I read your essay. No offense, but it's simply nonsense on a stick.
All this blather about "elasticity" doesn't change the central point: price is a reflection of the relationship between supply and demand. I notice you advocate "price ceilings" and "price floors," which is an artful way of avoiding what we normally call these: price controls.
Whenever naive people try to make the market into a "moral" issue, you can be confident you're dealing with someone who's quite sure of which morality should govern prices: his own. Thus, the moral judgement of "profiteering" is made. You, of course, sell your stuff at just the right moral price, but the other guy, why he's simply in it for the money. He's just needlessly sticking it to people.
Nothing you offer in your post refutes anything that's been said. Like the children in my earlier ice cream analogy, you simply have a platonic price you think things should "fairly" be sold at, and anything beyond that is "profiteering." Of course, you offer no criterion by which we can distinguish one from the other, because you do not have one (at least not one that's entirely arbitrary and made-up).
Tell me Hwang, what level of profit is "immoral"? Is any profit immoral? What about 10%? If 10% is okay, is 11% immoral? Is it only moral to profit off of people who have $1000 worth of disposable income? Or $10,000? Are we to sell things to all poor people at cost because they're poor?
Your insulin analogy is an apt one--but not for the reason you think. As I wrote on my blog several months ago, it's people with muddle-headed economic ideas like your own that actually cost people their lives during flu season. This past year, there was a shortage of flu shots. But thanks to vigilant moralists such as yourself, the "price cielings" were instituted to insure that nobody would be "gouged." Of course in reality what this actually meant was that even those who didn't really need flu shots too badly (such as high school and college students, healthy middle-aged folks, etc.) were able to get in on the bargain, ensuring there wouldn't be enough for those who really needed them and could die from the flu. And it also helped insure that the drug companies would have absolutely no insentive at all to produce lots more vaccine, since the price controls ensured that their money would be better spent elsewhere. Thousands of old, infirm people had wonderfully affordable flu shots--that they couldn't get because there were none left. Some of those folks died.
By not pricing the casual buyers out of the market, it was ensured that a healthy college kid was able to get a shot for about the same price as a Big Mac, while many of those to whom a vaccination would have been worth a hundred Big Macs (which are tough to eat anyway when you're dead) couldn't get one. But at least the moralist feels good at night, because he's dealing with platonic ideals and not the real world where people die.
The naive idealist (because of his flawed and unsupportable view of human nature) thinks the drug company is simply going to keep cranking out vaccine anyway at little profit or even at a loss because it's "just the right thing to do." And that people who don't really need vaccines will forego them in favor of the old and infirm. Which is what makes the naive idealist a boneheaded economist and a danger to real society. He has such a high view of his own moral intuition that he's willing to let people die in order to see it enacted.
I read your essay. No offense, but it's simply nonsense on a stick.
All this blather about "elasticity" doesn't change the central point: price is a reflection of the relationship between supply and demand. I notice you advocate "price ceilings" and "price floors," which is an artful way of avoiding what we normally call these: price controls.
Whenever naive people try to make the market into a "moral" issue, you can be confident you're dealing with someone who's quite sure of which morality should govern prices: his own. Thus, the moral judgement of "profiteering" is made. You, of course, sell your stuff at just the right moral price, but the other guy, why he's simply in it for the money. He's just needlessly sticking it to people.
Nothing you offer in your post refutes anything that's been said. Like the children in my earlier ice cream analogy, you simply have a platonic price you think things should "fairly" be sold at, and anything beyond that is "profiteering." Of course, you offer no criterion by which we can distinguish one from the other, because you do not have one (at least not one that's entirely arbitrary and made-up).
Tell me Hwang, what level of profit is "immoral"? Is any profit immoral? What about 10%? If 10% is okay, is 11% immoral? Is it only moral to profit off of people who have $1000 worth of disposable income? Or $10,000? Are we to sell things to all poor people at cost because they're poor?
Your insulin analogy is an apt one--but not for the reason you think. As I wrote on my blog several months ago, it's people with muddle-headed economic ideas like your own that actually cost people their lives during flu season. This past year, there was a shortage of flu shots. But thanks to vigilant moralists such as yourself, the "price cielings" were instituted to insure that nobody would be "gouged." Of course in reality what this actually meant was that even those who didn't really need flu shots too badly (such as high school and college students, healthy middle-aged folks, etc.) were able to get in on the bargain, ensuring there wouldn't be enough for those who really needed them and could die from the flu. And it also helped insure that the drug companies would have absolutely no insentive at all to produce lots more vaccine, since the price controls ensured that their money would be better spent elsewhere. Thousands of old, infirm people had wonderfully affordable flu shots--that they couldn't get because there were none left. Some of those folks died.
By not pricing the casual buyers out of the market, it was ensured that a healthy college kid was able to get a shot for about the same price as a Big Mac, while many of those to whom a vaccination would have been worth a hundred Big Macs (which are tough to eat anyway when you're dead) couldn't get one. But at least the moralist feels good at night, because he's dealing with platonic ideals and not the real world where people die.
The naive idealist (because of his flawed and unsupportable view of human nature) thinks the drug company is simply going to keep cranking out vaccine anyway at little profit or even at a loss because it's "just the right thing to do." And that people who don't really need vaccines will forego them in favor of the old and infirm. Which is what makes the naive idealist a boneheaded economist and a danger to real society. He has such a high view of his own moral intuition that he's willing to let people die in order to see it enacted.
Um, actually, my assertions about "elasticity" are fundamental microeconomics. Had you actually studied economics, you might have known that. If someone jacks up the prices 200% on gas even though their supply chain, and consequently their wholesale cost, has yet to be affected, just because there was a disaster in an area that might someday affect the price of gas, and you can't say that there isn't something immoral about that, then I'm afraid you're simply naive.
I never actually advocated price ceilings and floors, which leads me to believe that even if you were to study up on economics you'd miss the point entirely. I'm simply saying that these are all a part of an economic system, just like price gauging. Therefore, it doesn't make any sense to analyze the justification of price gauging from an economic point of view; economics itself rarely makes "moral" judgements on what is right and wrong. The analysis has to be done from a sociological point of view.
Bad motives don't matter in economics, that's true, and that's my point. It's pointless to make a decision on what is right or wrong from an economic point of view. People like you are simply hiding behind economics to justify immoral activity, as though because something falls within the confines of the "free market"--which by the way is a term that is absolutely meaningless in economics--it should be allowed and accepted wholeheartedly. You can't hide behind economics as a shield to protect you from the moral implications of the policies you advocate. Though I'm glad to know that the next time you pay $8 a gallon for gas you won't complain at all because it's all a part of the "free market."
Hwang
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I never actually advocated price ceilings and floors, which leads me to believe that even if you were to study up on economics you'd miss the point entirely. I'm simply saying that these are all a part of an economic system, just like price gauging. Therefore, it doesn't make any sense to analyze the justification of price gauging from an economic point of view; economics itself rarely makes "moral" judgements on what is right and wrong. The analysis has to be done from a sociological point of view.
Bad motives don't matter in economics, that's true, and that's my point. It's pointless to make a decision on what is right or wrong from an economic point of view. People like you are simply hiding behind economics to justify immoral activity, as though because something falls within the confines of the "free market"--which by the way is a term that is absolutely meaningless in economics--it should be allowed and accepted wholeheartedly. You can't hide behind economics as a shield to protect you from the moral implications of the policies you advocate. Though I'm glad to know that the next time you pay $8 a gallon for gas you won't complain at all because it's all a part of the "free market."
Hwang
# posted by : 7:57 PM
: 7:57 PM << Home
