Gasoline prices add 9/10 at the margin

A New Name for Price Gouging

by Elaine Schwartz    •    Nov 2, 2012    •    760 Views

Yesterday, a friend of mine waited on a gas line for 3 hours to fill his tank. The price was close to normal but the line was not.

Hearing about gas lines, I remembered when Boston’s water supply was temporarily undrinkable several years ago and politicians warned vendors not to increase the price of bottled water. Calling it “price gouging,” they said that when an emergency strikes, the last thing people want is to pay more.

But, I wonder…

Imagine 2 bottled water sellers. Making a small profit per bottle, one seller maintains her normal price. At $1.00, sales soar, her shelves are soon empty and they remain empty. Meanwhile the second vendor doubles her price and her profits. With the incentive to discover new water suppliers, she restocks.

Low price or more water? Which do you prefer?

But there is more to the story. What if the second vendor had to pay a fine for an excessive price increase because Boston had a price gouging law? A 2006 FTC report cites examples of gas stations in states with price gouging laws that have closed rather than risk a lawsuit for price hikes during an emergency.

And that returns us to my friend in the gas line. In NJ, a gasoline station was fined $50,000 for price gouging after Hurricane Irene. I wonder whether New Jersey’s price gouging law is affecting the length of gas lines. Maybe instead, we should just let the incentives on the supply side do their job.

And the new name for price gouging should be “increasing supply.”

Sources and Resources: This ungated WSJ article provides an insightful discussion of the impact of price gouging on demand and supply and the 2006 FTC report.

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