Tuesday, December 20, 2005

Gouging costs money 

Steven Horwitz has a story of a gas station in St. Lawrence county, New York, that is among 15 gas stations charged by AG Eliot Spitzer for price gouging during and after the Katrina price spike. The fellow orders gas from his wholesaler at one price, but the wholesaler delivered a day late to help the retailer by giving him gas at a price $.29/gal. lower. The retailer, not knowing he was getting the lower price, continued to charge customers based on the higher wholesale price. This tripped the price-fixing law in NY.

Markets work by letting people know when their prices do not match those offered by competitiors in the market, as Horwitz describes:
The owner of the store also reports that over the weekend when his price was at $3.80, his sales dropped significantly. He sold 1358 gallons on 9/2, 738 gallons on 9/3, and 429 gallons on 9/4. This was also Labor Day weekend, when lots of car travel happens. His sales didn't reach 1000 gallons again until 9/9. So the result of his supposed "price gouging?" A drop in sales! Gasp!! Demand curves slope downward after all! As the owner says in his defense "why would I purposely gouge somebody and watch my sales drop?"
The AG's office replies that consumers "had to pay the retail price" without explaining where the consumer bought the gallons they weren't buying from this retailer. Horwitz responds that "the AG's office treats consumers as passive victims, even though the evidence clearly shows they made active choices in the face of high prices."

Gouging laws, in short, are unable to comprehend the workings of markets.