Re: Free Market Works
 

Hurricane Katrina has prompted legislators in the Gulf region to again threaten prosecution for any violation of anti-gouging laws. It reminded me of a good article by Thomas Sowell last year.

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'Price gouging' in Florida
Thomas Sowell


In the wake of the hurricanes in Florida, the state's attorney general has received thousands of complaints of "price gouging" by stores, hotels, and others charging far higher prices than usual during this emergency.


"Price gouging" is one of those emotionally powerful but economically meaningless expressions that most economists pay no attention to, because it seems too confused to bother with. But a distinguished economist named Joseph Schumpeter once pointed out that it is a mistake to dismiss some ideas as too silly to discuss, because that only allows fallacies to flourish -- and their consequences can be very serious.


Charges of "price gouging" usually arise when prices are significantly higher than what people have been used to. Florida's laws in fact make it illegal to charge much more during an emergency than the average price over some previous 30-day period.


This raises questions that go to the heart of economics: What are prices for? What role do they play in the economy?


Prices are not just arbitrary numbers plucked out of the air. Nor are the price levels that you happen to be used to any more special or "fair" than other prices that are higher or lower.


What do prices do? They not only allow sellers to recover their costs, they force buyers to restrict how much they demand. More generally, prices cause goods and the resources that produce goods to flow in one direction through the economy rather than in a different direction.


How do "price gouging" and laws against it fit into this?


When either supply or demand changes, prices change. When the law prevents this, as with Florida's anti-price-gouging laws, that reduces the flow of resources to where they would be most in demand. At the same time, price control reduces the need for the consumer to limit his demands on existing goods and resources.


None of this is peculiar to Florida. For centuries, in countries around the world, laws limiting how high prices are allowed to go has led to consumers demanding more than was being supplied, while suppliers supplied less. Thus rent control has consistently led to housing shortages and price controls on food have led to hunger and even starvation.


Among the complaints in Florida is that hotels have raised their prices. One hotel whose rooms normally cost $40 a night now charged $109 a night and another hotel whose rooms likewise normally cost $40 a night now charged $160 a night.


Those who are long on indignation and short on economics may say that these hotels were now "charging all that the traffic will bear." But they were probably charging all that the traffic would bear when such hotels were charging $40 a night.


The real question is: Why will the traffic bear more now? Obviously because supply and demand have both changed. Since both homes and hotels have been damaged or destroyed by the hurricanes, there are now more people seeking more rooms from fewer hotels.


What if prices were frozen where they were before all this happened?


Those who got to the hotel first would fill up the rooms and those who got there later would be out of luck -- and perhaps out of doors or out of the community. At higher prices, a family that might have rented one room for the parents and another for the children will now double up in just one room because of the "exorbitant" prices. That leaves another room for someone else.


Someone whose home was damaged, but not destroyed, may decide to stay home and make do in less than ideal conditions, rather than pay the higher prices at the local hotel. That too will leave another room for someone whose home was damaged worse or destroyed.


In short, the new prices make as much economic sense under the new conditions as the old prices made under the old conditions.


It is essentially the same story when stores are selling ice, plywood, gasoline, or other things for prices that reflect today's supply and demand, rather than yesterday's supply and demand. Price controls will not cause new supplies to be rushed in nearly as fast as higher prices will.


None of this is rocket science. But Justice Oliver Wendell Holmes said, "we need education in the obvious more than investigation of the obscure."


September 14, 2004

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Re: Free Market Works
 

The premise of this article is stupid. The point about price controls in general is that they shift the supply curve because supply is elastic - you're talking about a long period of time and the assumption is that suppliers are capable of adapting their production of goods. In a short term situation, supply will never shift like this. Nobody is building a hotel in a couple days. So its not a question of anti-gouging laws being inefficient. Its just a question of whether you are going to allow producers to gather the full rent from a short-term disjunction of supply and demand. He tries to cover this up with these dumb anecdotes about demand changing, but that is basically beside the point. Isn't this guy supposed to be an economist?

Supply and/or Demand?
 

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The premise of this article is stupid ... In a short term situation, supply will never shift like this... He tries to cover this up with these dumb anecdotes about demand changing, but that is basically beside the point.

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I see. Your analysis completely excludes demand from the equation. His inclusion of demand you find to be "dumb anecdotes" and "beside the point".

Yes he is an economist.

Re: Supply and/or Demand?
 

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I see. Your analysis completely excludes demand from the equation. His inclusion of demand you find to be "dumb anecdotes" and "beside the point".

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Pretty much. Because the point about economic efficiency and price controls rests completely on the supply side. Controls shifting the demand curve in the short term has nothing to do with efficiency. In addition , the points he makes about demand - that large families will get fewer rooms and that people with decent enough houses wont get rooms - are totally speculative and probably represent very minor effects anyway.

Re: Supply and/or Demand?
 

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Pretty much. Because the point about economic efficiency and price controls rests completely on the supply side. Controls shifting the demand curve in the short term has nothing to do with efficiency.

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Who's defining efficiency?

Earlier you said -

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Its just a question of whether you are going to allow producers to gather the full rent from a short-term disjunction of supply and demand.

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I'm curious -- do you believe producers should be able to gather the full rent from a long term disjunction?

You also stated -

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In a short term situation, supply will never shift like this.

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It's amazing how quickly supply can change -- if you allow prices to change.

Unlike some -- I don't believe the supply chain is stocked because people are benevolent.

Re: Supply and/or Demand?
 

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Who's defining efficiency?

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I was refering to the degree that resources are being used in the most productive fashion possible. In this case, price controls only affect efficiency if supply can shift.

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I'm curious -- do you believe producers should be able to gather the full rent from a long term disjunction?

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In an abstract market system, a long term disjunction is theoretically not possible since supply will just adjust to the increased demand. Of course, it doesn't always work this way in the real world. I generally do not support price controls, but believe that other forms of intervention that can help foster competition are often necessary.

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It's amazing how quickly supply can change -- if you allow prices to change. Unlike some -- I don't believe the supply chain is stocked because people are benevolent.

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It depends on the sector. Nobody is building a hotel in a week to take advantage of a hurricane. Obviously supply does not depend upon benevolence. What does that have to do with anything?

Re: Supply and/or Demand?
 

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In an abstract market system, a long term disjunction is theoretically not possible since supply will just adjust to the increased demand.

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That assumes that prices are not held artifically low. If there are price caps, supply will decrease, not increase.

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Of course, it doesn't always work this way in the real world. I generally do not support price controls, but believe that other forms of intervention that can help foster competition are often necessary.

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Such as? And when *would* you support price controls?

Re: Supply and/or Demand?
 

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In this case, price controls only affect efficiency if supply can shift.

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What would motivate people to quickly shift the supply, if the price is controlled? I can quickly get all the plywood I want if I'm willing to fly it in or truck it in -- if I want it at the same price it was at it's going to have to come by rail, and take six weeks. Supply can shift because demand allows prices to shift.

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I generally do not support price controls, but believe that other forms of intervention that can help foster competition are often necessary.

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You believe that market intervention can foster competition?

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It depends on the sector. Nobody is building a hotel in a week to take advantage of a hurricane.

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You'd be surprised how quickly that beach could be lined with 5-star motor homes and all the support services -- in an open market.

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Obviously supply does not depend upon benevolence. What does that have to do with anything?

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Only that it is the incentives provided by higher prices that allow the market to quickly supply an artificially high demand.

Re: Free Market Works
 

The price gauging law created in florida was a big mistake, let the free market run its course.

Re: Supply and/or Demand?
 

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That assumes that prices are not held artifically low. If there are price caps, supply will decrease, not increase.

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When I referred to the abstract market system, the assumption is that there are no price controls. Of course price controls can shift the supply curve, but not in the short term example we are discussing.

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Such as? And when *would* you support price controls?

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I would hardly ever support price controls. But in some situations such as war-time economies, they may be justified.

Other forms of market intervention to increase/ensure competition are incredibly common, especially in complicated sectors like telecommunications.

Re: Supply and/or Demand?
 

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Pretty much. Because the point about economic efficiency and price controls rests completely on the supply side.

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economic efficiency has to also rest on demand side

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Controls shifting the demand curve in the short term has nothing to do with efficiency. In addition , the points he makes about demand - that large families will get fewer rooms and that people with decent enough houses wont get rooms - are totally speculative and probably represent very minor effects anyway.

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minor effects in the long term economy is key... over government involvement to disrupt these high prices has little to do with influence major swings in the economy. It has to do with preventing bigger or longer lasting swings in overall market as well as negative side effects that may result in "price gouging" such as a sudden increase in crime like theft.

Re: Supply and/or Demand?
 

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Other forms of market intervention to increase/ensure competition are incredibly common, especially in complicated sectors like telecommunications.


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In sectors like telecommunications, market intervention is almost universally done to prevent competition.

Re: Supply and/or Demand?
 

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What would motivate people to quickly shift the supply, if the price is controlled? I can quickly get all the plywood I want if I'm willing to fly it in or truck it in -- if I want it at the same price it was at it's going to have to come by rail, and take six weeks. Supply can shift because demand allows prices to shift.

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I don't understand what you're arguing here. Let's talk hotels. Supply cannot shift in the short term because you can't build hotels that fast. Therefore, the overall efficiency of the economy is not changed. Fluctuations in short term demand induced by the price controls have no effect on this picture. Got it?

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You believe that market intervention can foster competition?

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Obviously. This is the case for many sectors, especially complicated ones like telecom.

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You'd be surprised how quickly that beach could be lined with 5-star motor homes and all the support services -- in an open market.

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You need permits to put those things on public beaches as well as licenses to open them as hotels. Whether those regulations are good or not is beside the point. In current conditions, supply is not elastic in the short term and it doesnt depend upon the price. You are fighting a losing battle here arguing against this.

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Only that it is the incentives provided by higher prices that allow the market to quickly supply an artificially high demand.

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But in this case it doesn't really matter. You are not getting higher supply in the short term at $160 a room versus $40 a room anyway.

Re: Supply and/or Demand?
 

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In sectors like telecommunications, market intervention is almost universally done to prevent competition.

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Wrong.

Re: Supply and/or Demand?
 

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I don't understand what you're arguing here. Let's talk hotels. Supply cannot shift in the short term because you can't build hotels that fast. Therefore, the overall efficiency of the economy is not changed. Fluctuations in short term demand induced by the price controls have no effect on this picture. Got it?

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So supply is constrained. That means price caps are good? Should gas prices be capped? Wells and refineries are supposedly at capacity.

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But in this case it doesn't really matter. You are not getting higher supply in the short term at $160 a room versus $40 a room anyway.

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So what? You're getting fairer allocation.

Re: Supply and/or Demand?
 

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Other forms of market intervention to increase/ensure competition are incredibly common, especially in complicated sectors like telecommunications.

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You mean like the intervention that gave the Bell companies a lock on local service which they are still leveraging today?

Wrong?
 

The author may have a "compelling political challenge" -- I haven't read it. But I did see the list of reviewers;

--Deputy Chairman, Lloyds TSB Group, plc.
--Japan Times
--Gerald L. Curtis, Columbia University
--Comparative Political Studies

Think about it. Today we can perform almost all communication services over fiber. Cable TV, Internet, Telephony, etc. The entire network was built with virtually no regulation, because the content of the fiber was not anticipated. The entire worldwide network was built in a few short years, and is now available as a conduit for all of these competing services.

Compare this to regulated services -- cable tv (regulated monopoly), telephone (regulated monopoly), etc.

Even with the incredibly inefficient duplication of services, myriad of access methods, and fees for private right-of-ways, --- it beats all regulated services.

Obviously there are competing bandwidth considerations for wireless services, and some regulation is necessary -- but it's not to foster competition.

Re: Wrong?
 

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Think about it. Today we can perform almost all communication services over fiber. Cable TV, Internet, Telephony, etc. The entire network was built with virtually no regulation, because the content of the fiber was not anticipated. The entire worldwide network was built in a few short years, and is now available as a conduit for all of these competing services.

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Regulation is absolutely key to telecommunications. You are not going to have multiple companies owning there own physical infrastructure and thus you have a very complex regulatory environment setting up rules to structure the ways in which companies share the infrastructure.

In most countries, deregulation of monopolies in telecom (which was obviously a good thing) involved a lot of intervention to get enough major players into the market. The market system was not going to provide sufficient competition on its own, because the barriers to entry were way too high and entrenched players were too powerful.

The point is not that regulated monopolies are better (obviously not) but that "deregulation" in complex sectors really has just amounted to "reregulation," since the market alone will not provide optimal competition structures.

Re: Supply and/or Demand?
 

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So supply is constrained. That means price caps are good? Should gas prices be capped? Wells and refineries are supposedly at capacity.

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Don't try to shift the debate just because you're losing it. Sowell argued that price gouging laws were inefficient and detrimental. I pointed out that this was stupid because we were dealing with a short term situation in which supply wasn't going to shift. Nowhere in this thread have I argued that price caps would always be good if supply was constrained.

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So what? You're getting fairer allocation.

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What does that mean? What is fair in the market system is totally subjective. Again, don't just try to shift the debate because you're losing it.

Re: Supply and/or Demand?
 

Last year we had a supply line failure to the entire city of Phoenix. Almost all retailers had empy tanks, and when they received a delivery it was gone in hours. The Governor threatened a "gouging" law -- but never did anything. Most stations simply added the transportation costs, and sold at about .25 over the previous price. There were several stations which sold at around $5 a gallon -- and none of them were ever without fuel. In most stations, the wait was frequently an hour or more. There were no lines at $5 an hour. So price can and did effect supply in the short term. Because some stations sold at $5 it meant that I could get gas if I needed it in an emergency. For other people, such as my attorney who charges me $400 an hour (and includes travel time), I welcomed the $5 a gallon gas.

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In current conditions, supply is not elastic in the short term and it doesnt depend upon the price. You are fighting a losing battle here arguing against this.


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I may be fighting a losing battle -- but economic realities aren't won or lost in battles.

Re: Wrong?
 

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Regulation is absolutely key to telecommunications. You are not going to have multiple companies owning there (sic) own physical infrastructure and thus you have a very complex regulatory environment setting up rules to structure the ways in which companies share the infrastructure.

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Very wrong. The infrastructure is separated from the service, and the infrastructure is capable of delivering multiple competing services -- this is the current (unregulated not deregulated) model. This is the model that is gaining share. Haven't you noticed yet how quaint and useless the copper pairs coming into your home are? If you haven't, you will.

Re: Supply and/or Demand?
 

Gas and hotels are simply different sectors. I never said that supply was inelastic in the short term for every product.

Re: Wrong?
 

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Very wrong. The infrastructure is separated from the service, and the infrastructure is capable of delivering multiple competing services -- this is the current (unregulated not deregulated) model.

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Right, and wrong. Someone owns that infrastructure, and sometimes that company provides services too. What keeps them from blocking competing service providers from using the infrastructure? What ensures that when companies share the infrastructure, some don't get a raw deal that damages the quality of their product?

Re: Supply and/or Demand?
 

The same rules apply. Did you ever try to get a hotel room in New Orleans during Mardi Gras? Or tickets to the Super Bowl? It's absolutely amazing that as the price you are willing to pay goes up -- they suddenly become available.

Re: Wrong?
 

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What keeps them from blocking competing service providers from using the infrastructure? What ensures that when companies share the infrastructure, some don't get a raw deal that damages the quality of their product?


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The fact that they are not a monopoly sponsored by the "regulators" is what prevents this. I'll just go to a competing service. Are you familiar with NAPs and peering agreements? These were all done without regulation. With regulation you get monopolies and lack of competition.

Did you know that Internet providers all share their multiple and redundant networks free of charge?

Re: Supply and/or Demand?
 

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The same rules apply. Did you ever try to get a hotel room in New Orleans during Mardi Gras? Or tickets to the Super Bowl? It's absolutely amazing that as the price you are willing to pay goes up -- they suddenly become available.

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Supply is not increasing. It's not like somebody is printing more tickets or building a new hotel.

Re: Supply and/or Demand?
 

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Don't try to shift the debate just because you're losing it. Sowell argued...

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I never said that unmolested markets would magically make new hotel rooms appear. Don't project a loser position onto me just so you can claim victory. I only asserted that pricecaps are detrimental.


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So what? You're getting fairer allocation.

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What does that mean? What is fair in the market system is totally subjective. Again, don't just try to shift the debate because you're losing it.

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It means that the rooms are being rented out at the price that the market decides is fair. Period.

Re: Wrong?
 

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The fact that they are not a monopoly sponsored by the "regulators" is what prevents this. I'll just go to a competing service. Are you familiar with NAPs and peering agreements? These were all done without regulation. With regulation you get monopolies and lack of competition.

Did you know that Internet providers all share their multiple and redundant networks free of charge?

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As far as I understand it, peering agreements are set up between ISPs to physically connect networks and share traffic. But ISPs do not all have their own unique infrastructure on the user end. They in turn must pay for the right to send that data to you over the phone line or whatever other access infrastructure. And that is where you get one instance of regulation to ensure true competition.

Re: Supply and/or Demand?
 

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Don't project a loser position onto me just so you can claim victory. I only asserted that pricecaps are detrimental.

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The original argument was never about whether pricecaps were detrimental in general. If that's your point, fine, but it was never contested.

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It means that the rooms are being rented out at the price that the market decides is fair. Period.

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Ok, as I noted beforehand, that's just a subjective opinion what's "fair" in a market economy. It has nothing to do with efficiency, which is what the debate has been about.

Re: Supply and/or Demand?
 

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Supply is not increasing. It's not like somebody is printing more tickets or building a new hotel.

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And this is what pvn meant when he said "You're getting fairer allocation".

People who value the money more than the hotel room, get the money -- People who value the hotel room more than the money, get the room. And all without interference.

Re: Supply and/or Demand?
 

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People who value the money more than the hotel room, get the money -- People who value the hotel room more than the money, get the room.

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This will be true if the price is controlled as well.

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And all without interference.

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This is what "fairness" comes down to, which is why it is just subjective.

Re: Wrong?
 

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As far as I understand it, peering agreements are set up between ISPs to physically connect networks and share traffic. But ISPs do not all have their own unique infrastructure on the user end. They in turn must pay for the right to send that data to you over the phone line or whatever other access infrastructure. And that is where you get one instance of regulation to ensure true competition.


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There are several tiers of providers. On the top, there are peering agreements, below the top all providers honor the tier 1 agreements. The competition is guaranteed because disagreement would collapse the system (but only for the dissenting party, since there is enough redundancy to heal or re-route any single defector). If I don't like my providers service, I can switch service and still have complete access to the entire www.

The only thing that could make the system fail is if there was regulation. Most politicians have noticed the success. Nothing politicians have regulated has ever worked as well. I have to give them some credit, it's why all parties have been reluctant to regulate Internet.

Re: Supply and/or Demand?
 

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People who value the money more than the hotel room, get the money -- People who value the hotel room more than the money, get the room.

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This will be true if the price is controlled as well.


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Absolutely not true. See examples I have given for gas, rooms, and tickets.

The market price has got to be able to move for this statement to be true.

Re: Wrong?
 

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There are several tiers of providers. On the top, there are peering agreements, below the top all providers honor the tier 1 agreements. The competition is guaranteed because disagreement would collapse the system (but only for the dissenting party, since there is enough redundancy to heal or re-route any single defector). If I don't like my providers service, I can switch service and still have complete access to the entire www.

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Yes, but these agreements themselves, which may be entered into voluntarily, depend upon a regulated system for sharing the actually infrastructure.

SBC owns the phone lines and switching systems that bring telephony into my house. What is to prevent them from deciding that they will only carry SBC DSL services over these lines? The answer is regulation. This is not an abstract question. These regulations exist as written law.

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The only thing that could make the system fail is if there was regulation.

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There already is plenty of regulation in many areas and the system is not failing.

Re: Supply and/or Demand?
 

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Absolutely not true. See examples I have given for gas, rooms, and tickets.

The market price has got to be able to move for this statement to be true.

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If the price of a hotel room is set at $40, how is it not true that people who value the room more than $40 will rent the room and those that value the $40 more than the room will keep the money?

Re: Wrong?
 

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SBC owns the phone lines and switching systems that bring telephony into my house. What is to prevent them from deciding that they will only carry SBC DSL services over these lines? The answer is regulation. This is not an abstract question. These regulations exist as written law.


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I don't know SBC, sounds like it's a phone company -- and yes, telcos are regulated. They're not really your Internet provider, they're your access provider. If you don't like them you can switch (depending on where you're located) to satellite, cable, microwave, wireless broadband, etc. -- the number of access options just keeps increasing -- and it's that competition that keeps the price down. Public right-of-ways has been the big issue to create regulated utils in the past (phone, cable, etc). Since all services can now use a common medium, and we can packet switch multiple services using multiple access options -- these aren't really issues. Regulation ends when your access provider plugs you into the Internet backbone. I use microwave access directly to UUNET, and can at-will dial it up to about 13Mb (about 200+ phone lines) -- it's completely deregulated and I have a choice of several independent competing services.

Re: Wrong?
 

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Regulation ends when your access provider plugs you into the Internet backbone.

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I think we're just talking past each other because I am talking about regulation that affects how access providers share their physical infrastructure and you are talking about what happens afterwards.

Most service still comes over telephone lines or cable lines, and these lines are controlled by access providers like SBC that are often also in the business of providing internet services. If these companies were not forced to provide use of their infrastructure to others, then they could essentially just shut out the competition.

Re: Supply and/or Demand?
 

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If the price of a hotel room is set at $40, how is it not true that people who value the room more than $40 will rent the room and those that value the $40 more than the room will keep the money?

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There has to be a reason to artificially set the price at $40. The most obvious is because the proprietor values it higher (why else control it?).

Let's say the owner values it at $100. If there is an artificial limit set at $40, he will still rent it -- because it is an unrecoverable asset (it can't be placed into inventory). But he valued it higher. I may value it at $100 as well, so I either get a great deal -- or find it unavailable because it was artifically priced too low. In the later case, both I and the proprietor were denied the right to make a deal we both thought was fair, and the beneficiary of our loss is some unknown person who got a great deal.

If the asset is recoverable, the proprietor may choose not to sell it at all. For example, you'll notice that when an event that could effect the price of gasoline occurs -- or crude oil goes up -- the price at the pump is immediately raised. This makes sense, since the owner is selling based on replacement cost -- not what he paid for the current inventory. If there was speculation that gas would go to $10 a gallon, and I had 10,000 gallons in the ground, and the govenment told me I could only charge $3 -- I would probably lock the doors and not sell it at all until the market stablized.

Re: Supply and/or Demand?
 

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People who value the money more than the hotel room, get the money -- People who value the hotel room more than the money, get the room.

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This will be true if the price is controlled as well.


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But the people who value the room the MOST will NOT necessarily get the room, and THAT is why efficiency IS degraded with pricecaps, even for products without elastic supply.

Re: Wrong?
 

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Most service still comes over telephone lines or cable lines, and these lines are controlled by access providers like SBC ...

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Smaller every day. Disappearing. It's just legacy regulations. You're crossing a public right-of-way to get onto your private property. Original point was there is not an argument for regulation or for more regulation -- there is a good example of what can be done with less.