Another Reason to Be Down on Chris Christie: He Doesn’t Understand Basic Economics As Well As . . . Ron Paul (Alternate Post Title: Hooray for Price Gouging!)
It was recently reported that New Jersey is going after those damned price gouging gas station owners:
New Jersey authorities filed civil suits Friday accusing seven gas stations and one hotel of price gouging in the wake of Hurricane Sandy.
“New Jersey has a tough price gouging law to ensure that profiteers will not take unfair advantage of people at their most vulnerable — those who have been displaced from their homes, have limited resources, and are seeking fuel, shelter and the basic necessities of life,” said Governor Chris Christie. “Businesses operating in New Jersey will obey our laws — or face significant penalties.”
Thanks, Gov. Christie! What could possibly go wrong?!
Oh — coincidentally, there were significant gas shortages in New Jersey during Sandy.
Any guesses as to why? (Yes, there are a variety of factors, but one of them is economic in nature.)
I sat down to write a tribute to price gouging, which is simply a pejorative name for the raising of prices when depressed supply meets increased demand. But then I found that one had already been written.
By Ron Paul. It’s called In Praise of Price Gouging.
As the northeastern United States continues to recover from Hurricane Sandy, we hear the usual outcry against individuals and companies who dare to charge market prices for goods such as gasoline. The normal market response of rising prices in the wake of a natural disaster and resulting supply disruptions is redefined as “price gouging.” The government claims that price gouging is the charging of ruinous or exploitative prices for goods in short supply in the wake of a disaster and is a heinous crime. But does this reflect economic reality, or merely political posturing to capitalize on raw emotions?
In the wake of Hurricane Sandy, the supply of gasoline was greatly disrupted. Many gas stations were unable to pump gas due to a lack of electricity, thus greatly reducing the supply. At the same time demand for gasoline spiked due to the widespread use of generators. Because gas stations were forbidden from raising their prices to meet the increased demand, miles-long lines developed and stations were forced to start limiting the amount of gasoline that individuals could purchase. New Jersey gas stations began to look like Soviet grocery stores.
Had gas stations been allowed to raise their prices to reflect the increased demand for gasoline, only those most in need of gasoline would have purchased gas, while everyone would have economized on their existing supply. But because prices remained lower than they should have been, no one sought to conserve gas. Low prices signaled that gas was in abundant supply, while reality was exactly the opposite, and only those fortunate enough to be at the front of gas lines were able to purchase gas before it sold out. Not surprisingly, a thriving black market developed, with gas offered for up to $20 per gallon.
With price controls in effect, supply shortages were exacerbated. If prices had been allowed to increase to market levels, the profit opportunity would have brought in new supplies from outside the region. As supplies increased, prices gradually would have decreased as supply and demand returned to equilibrium. But with price controls in effect, what company would want to deal with the hassle of shipping gas to a disaster-stricken area with downed power lines and flooded highways when the same profit could be made elsewhere? So instead of gas shipments flooding into the disaster zones, what little gas supply is left is rapidly sold and consumed.
Exactly 100% right.
This is simple, basic economics. It’s supply and demand. It’s about allocating scarce resources, and providing incentives to meet increased demand.
Bashing the price gougers feels good, I guess. But it’s the wrong thing to do in a crisis. And anyone with any basic economic sense knows it.
I am less impressed with Chris Christie all the time.