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
With Hurricane Sandy having just blown through my NJ neighborhood, our streets are covered with wires, leaves, branches and several huge trees. During the storm, Consolidated Edison darkened large swaths of NYC and the New York Stock Exchange suspended trading for 2 days. With schools, offices, bridges, tunnels and malls closed, I’ve been reading about the economics of natural disasters.
After its 2010 earthquake, Haiti suffered more than 200,000 fatalities and economic devastation. Chile was hit by a more intense earthquake in a densely populated area but had many fewer deaths and much less of a GDP impact. Had the quake struck a deserted island, it would have been a non-event.
The difference from Haiti to Chile to that uninhibited island was vulnerability–a vulnerability that related directly to each country’s economy. Nobel laureate Amartya Sen expressed that economic vulnerability to natural disasters when he said,”Starvation is the characteristic of some people not having enough food to eat. It is not the characteristic of there being not enough food to eat.” (from Sen, 1981, in his economic history of famines)
The Inter-American Development Bank (IDB) 2010 paper that quoted Dr. Sen and started me thinking about disaster economics and vulnerability presented conclusions from other disaster studies that I wanted to share with you:
- More unequal societies tend to have less allocated to disaster prevention.
- In nations with stronger property rights, the impact of natural disasters tends to be weaker.
- In India, more newspaper distribution meant less natural disaster impact. (Perhaps because the media exert political pressure.)
- US politicians benefit more from disaster aid than prevention.
- Autocratic regimes tend to have deadlier famines than democracies.
Where does this leave us? The economics of natural disasters are about more than prevention and response.
And finally…Thinking about a natural disaster, economics and vulnerability, I recommend seeing “Beasts of the Southern Wild.”
Sources and Resources: My facts and the graph below are primarily from an IDB Working Paper-124, “The Economics of Natural Disasters,” and a Nature article from 1/10/12.
From: Inter-American Development Bank, WP-124
I have to admit that the Pulaski Skyway terrifies me. Driving across it, I always remember the Minneapolis bridge that collapsed during rush hour in 2007.
The Pulaski Skyway is an 80-year-old rickety looking structure. A sister to the Minneapolis bridge, the skyway is among the network of roads leading to lower Manhattan through the Holland Tunnel. With no trucks because of its narrow lanes and no tolls, it is the fastest and cheapest way for me to get into the city.
The congressional battle about transportation funding is what started me thinking about the Pulaski Skyway. Unable to agree on long term policy, Congress just approved a 90-day stopgap measure that temporarily funds ongoing transportation projects. If Congress is unable to act and New Jersey has big budget problems, how to fund a $1 billion+ Pulaski Skyway project?
That took me to Harvard Professor Edward Glaeser. He says that during our (national) youth, we built the Erie Canal (1825), the first Transcontinental Railroad (1869), the Panama Canal (1914) and (as a young adult) the first interstate highway system (1956). But now we are middle aged. We have to forget about the romance of high speed rail. No longer can we dive into massive politically attractive projects with federal funding. Instead, we need “smart, incremental changes” with users paying the bills, congestion pricing, more private participation and more buses.
So yes, I would accept congestion pricing, a toll, and a higher NJ gas tax for a new Pulaski Skyway. (But the bus? Probably not.)
The grade that the Pulaski Skyway received? With 9 the best and 0, a shutdown, both the Pulaski Skyway and the (collapsed) Minneapolis bridge got a 4 for structure from federal inspectors.
Our bottom line: This about a lot more than the Pulaski Skyway. It is about a wise fiscal approach to an aging transportation infrastructure.
Please note that this entry was edited after it was first posted.
Do higher taxes make you want to move? Hearing that taxes were going up in Illinois, the governor of Wisconsin said, “Escape to Wisconsin.”
According to census figures, people do seem to be moving to no income tax states. One journalist explains that Texas has become an “engine of growth” because of its “diversified economy, business-friendly regulations, and low taxes.” For Texas, more people will also mean 4 more seats in the House of Representatives.
However, with a $15 billion deficit, Illinois’s governor indicated a tax hike was imperative. Meanwhile, with a $10.5 deficit, New Jersey’s governor emphasizes spending cuts. Both are worried about businesses and residents leaving their state.
The Economic Lesson
The unencumbered movement of people, goods and services over vast areas fuels economic growth. People and resources are then able to optimize their goals by moving. Furthermore, when factories have a larger market, they can enjoy economies of scale. They also have more consumers to target, a larger labor market, and additional places to obtain natural resources and capital.
Asking what makes people move, Harvard economist Ed Glaeser suggests taxes are not necessarily the reason. Instead, his research indicates that fewer land use and construction regulations result in lower cost housing. Cheaper real estate attracts migration.
Which state postponed a pension fund payment of $3.1 billion because of big budget problems and had a 2.4% decrease in its real GDP? (Still though, this state has the second highest median income.)
The answer? New Jersey.
New Jersey, though, is not alone. Jon Stewart told us that Arizona had to sell its statehouse (which included the governor’s office). A potential California default was the prototype for an Economist simulation. Illinois borrowed money to fund its pension obligations and then had to borrow money to repay the original loan.
According to a Pew study on state financial problems, “Most Americans (58%) say the states should fix their own budget problems by raising taxes or cutting services.” But, “…large majorities oppose…” cutting major spending categories which include education, pubic safety (police and fire), and health care.
Perhaps the reason for the contradiction is opportunity cost. The individual opportunity cost of cuts is far different from the statewide cost.
The Economic Lesson
Looking at a BEA map of state economic growth during 2009 provides a snapshot of state health. Oklahoma is at the top (+6.6%) and Nevada, the bottom (-6.4%). For the GDP of individual states, agriculture, forestry, fishing, hunting, and mining fueled growth. On the minus side, less durable goods production (goods lasting longer than 3 years) and construction diminished economic activity.
Composed of gross investment (primarily business purchases and residential housing), consumer spending, government spending, and exports minus imports, the GDP is a yardstick of the value of goods and services production.