Tuesday, September 27, 2005

Gouging? What's that?

When hurricane Rita came close to Houston there were massive amounts of evacuees. As a result of this sudden increase in drivers and rational predictions that future shipments might take a while, the gas price shot up at local stations. Shortly after this, local officials sent out a warning that they would prosecute “price-gougers.” Price-gouging is a hot topic, largely because no one has ever seen it happen.

The law in Texas states that suppliers can be prosecuted for “Selling or leasing fuel, food, medicine or another necessity at an exorbitant or excessive price” during “…a disaster declared by the Governor...” The problem with this law is that it discourages gas stations to keep larger stocks of fuel when an emergency is coming up.

The biggest incentive to a producer is price. The ability to make a larger profit causes massive increases in supply in order to quell a shortage. If a hurricane is coming it doesn’t take Al Greenspan to figure out that gas is going to be demanded a little more than usual. As a result of this speculation, gas stations are more likely to increase their stocks. The amazing thing about this is that by doing so, they keep the price down because when the demand increases, there will also be more supply to answer the demand. Although the prices will most likely rise, they would definitely rise more if there was no increase in supply.

What this Texas law does, though, is take away some of that incentive to plan ahead with large supplies. If you know you won’t legally be allowed to charge more than, say, $3.00 per gallon, you wouldn’t keep as high a supply as you would if you might be able to charge, say $3.50 per gallon. The anticipation of a higher price makes it more cost effective to increase supply.

Secondly, a rise in price discourages people from wasting a precious resource. If the price of gas goes up, then people are less likely to use gas to power a generator for watching movies when the power goes out. It also discourages people to drive extra vehicles out of the area, thus decreasing traffic.

Even if a gas station doesn’t plan ahead and increase supply they still assist in the above mentioned mission of higher prices. People pay what they think is reasonable for a resource. If people aren’t willing to pay a certain price for gas, then the price will come down. It’s basic economics.

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