Tag Archives: Hurricane Irene

11.02.2012 | A New Name for Price Gouging

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 price gouging and the 2006 FTC report.

Posted by: adminEcon
Tags: demand, excessive price increases, gas lines, gas prices, Hurricane Irene, Hurricane Katrina, Hurricane Sandy, New Jersey, price gouging, supply, the power of the market
Comments (0) Add a Comment

07.08.2012 | Getting More Power

After Hurricane Irene last August, I lost my electricity for 8 days. Then, only weeks later, after a surprise snow storm, all over again, 8 days without power. Facing a similar plight last week, economist Arnold Kling asked why the lights were out for so long.

His answer? Reliability has no price.

Problem #1: Dr. Kling’s Washington D.C. provider (mine is in NJ), Pepco, is a regulated monopoly. Where then, he asks, is the incentive to improve service? With no competition, unless things get pretty bad, they have the business.

Problem #2: Reliability has no price. As King says, “…when there is no market price for something of value, incentives are bound to be misaligned.” By contrast, Pepco’s preparation for the unknown that might never happen can have a steep price.

Kling suggests reliability insurance. Any customer who wants a guarantee that her power will not be out for longer than 4 hours has a higher monthly bill. And, if the power company does not comply, then it owes the customer a certain amount, like $20 an hour after the fourth blackout hour.

Whether Dr. Kling has a workable solution, I am not sure. However, he has pointed out how crucial prices are. As sources of incentive and information, they shape business and consumer decisions.

Don’t prices give us more power?

A final thought: Remember the pre-breakup, before 1984, AT&T? A regulated monopoly, they were reliable. So too was the Eastern Airlines NY to Washington D.C. shuttle. Was it only the guaranteed profit margins that distinguishes them from “deregulated” electricity markets?

I read about Arnold Kling’s power outage and his response here after seeing a link on marginal revolution.com. In Econ 101 1/2 you can read about the original AT&T and the breakup (pp. 254-264).

Posted by: adminEcon
Tags: at&t, Eastern Airlines shuttle, electricity market, Hurricane Irene, JCP&L, Pepco, power companies, price, regulated monopolies
Comments (0) Add a Comment

09.01.2011 | Stormy Issues

For Hurricane Irene relief, the debate is again about the debt.

Let’s start with the Congress.

Expressed by Texas Representative Ron Paul, government should not play a role because “intrusive” bureaucracy” hinders local people and volunteers. Instead, private insurance is the key.
At the other extreme is Vermont Senator Bernard Sander’s position. He has said that we should unite as a nation, absorb the cost, and help each other when faced with a disaster.
The third point of view comes from Virginia Representative Eric Cantor. Yes, he says we have a responsibility to help each other. However, emergency spending has to be offset by cuts elsewhere.

And now, the economists….

The Economic Lesson

While Paul Krugman and Steven Landsburg disagree, each relates his position on disaster relief to marginal benefit and marginal cost. Whether discussing corporate profit or disaster relief, the point at which Marginal Cost equals Marginal Benefit (MC=MB or MC = MR..Revenue) is the optimal point beyond which we should not continue a certain activity.

It makes sense. We do not want to continue most things when the cost of doing something extra exceeds the benefit of that extra amount.

However, we cannot consider the budget for Irene alone. Then, surely, MB would vastly exceed MC. Krugman and Landsburg point out that we have to look at all federal spending to assess MC and MB.

An Economic Question: After looking here, do you believe the Landsburg prom example adequately explains why he thinks Krugman is wrong?

The above post is a revised version of the original which included a summary of Krugman and Landsburg.

Posted by: adminEcon
Tags: debt, deficit, disaster relief, Hurricane Irene, marginal benefit, marginal cost, Paul Krugman, Steven Landsburg
Comments (0) Add a Comment