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Ron Paul: In Praise of Price Gouging

by Ron Paul | paul.house.gov

As the northeastern United States continues to recover from Hurricane Sandy, we hear the usual outcry against individuals and companies who dare to charge market prices for goods such as gasoline. The normal market response of rising prices in the wake of a natural disaster and resulting supply disruptions is redefined as “price gouging.” The government claims that price gouging is the charging of ruinous or exploitative prices for goods in short supply in the wake of a disaster and is a heinous crime  But does this reflect economic reality, or merely political posturing to capitalize on raw emotions?

In the wake of Hurricane Sandy, the supply of gasoline was greatly disrupted. Many gas stations were unable to pump gas due to a lack of electricity, thus greatly reducing the supply.  At the same time demand for gasoline spiked due to the widespread use of generators. Because gas stations were forbidden from raising their prices to meet the increased demand, miles-long lines developed and stations were forced to start limiting the amount of gasoline that individuals could purchase. New Jersey gas stations began to look like Soviet grocery stores.

Had gas stations been allowed to raise their prices to reflect the increased demand for gasoline, only those most in need of gasoline would have purchased gas, while everyone would have economized on their existing supply. But because prices remained lower than they should have been, no one sought to conserve gas.  Low prices signaled that gas was in abundant supply, while reality was exactly the opposite, and only those fortunate enough to be at the front of gas lines were able to purchase gas before it sold out.  Not surprisingly, a thriving black market developed, with gas offered for up to $20 per gallon.

With price controls in effect, supply shortages were exacerbated.  If prices had been allowed to increase to market levels, the profit opportunity would have brought in new supplies from outside the region.  As supplies increased, prices gradually would have decreased as supply and demand returned to equilibrium. But with price controls in effect, what company would want to deal with the hassle of shipping gas to a disaster-stricken area with downed power lines and flooded highways when the same profit could be made elsewhere?  So instead of gas shipments flooding into the disaster zones, what little gas supply is left is rapidly sold and consumed.

Governments fail to understand that prices are not just random numbers. Prices perform an important role in providing information, coordinating supply and demand, and enabling economic calculation. When government interferes with the price mechanism, economic calamity ensues. Price controls on gasoline led to the infamous gas lines of the 1970s, yet politicians today repeat those same failed mistakes. Instituting price caps at a below-market price will always lead to shortages. No act of any legislature can reverse the laws of supply and demand

History shows us that the quickest path to economic recovery is to abolish all price controls. If governments really want to aid recovery, they would abolish their “price-gouging” legislation and allow the free market to function.

SOURCE

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Related SF Gate article on the subject




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Price "gouging" is the humane thing to do.

Thanks Dr. Paul for the excellent article. Reading through the comments it seems like some people still don't get it. Surprising for this crowd who should have a better understanding of how free markets work.

If you still don't agree with Ron on this or need more help explaining this concept to your friends, I wrote an article about price gouging using a simplified real world example. It helps clarify the cause and effect of price gouging and many people have told me it helped them to understand the issue in a way they had never thought of.

The article is here: http://libertyinsight.com/2012/11/02/price-gouging-during-a-...

For more liberty, check out my blog at:
http://www.libertyinsight.com

In the age of the "Founding Fathers" corporations...

When people on this site start talking "Cartels" right along side "The Market", maybe I'll tune in for informative and reality based discussions.

Plenty of information available on how market prices are manipulated by "The Market".

Do I need to mention, "The Market" and "Cartels" also control the regulators and the legislators? It's a complicated game of chronic problems, reactions, solutions.

It's wise to assume, based on historical records concerning political movements, "The Powers that Should not Be" will move the libertarians by their strings.

In the age of the "Founding Fathers" corporations could only be in business/market for 20 years.
Is that central planning?
Maybe we ought to get back to that?

High prices attract supply

Last decade a pipeline between Tucson and Phoenix broke shutting down 1/3 of the cities supply of gasoline.

I started noticing gas stations closing (bags tied around gas nozzles) At first I figured it was a large maintenance cycle, but then it continued and then everyone took notice and began asking questions. Panic buying ensued and within 24 hours all available gas was moved from underground tanks into peoples gas tanks. Prices rocketed up from $1.30 to (gasp) $3.50/gallon. Long lines still existed but it wasn't more than 45 minutes to an hour in my experience.

As much as I hated our governor at the time (current DHS director)
She kept her hands off prices and temporarily lifted environmental regulations (her arm was twisted).

There was a simmering uproar from people complaining about gouging.
What the complaining public didn't realize was the higher prices were already attracting supply from neighboring cities. The lifted environmental regulations allowed any formula to be trucked in. The crisis resolved itself rapidly. Those that needed gas most were able to get it as some gas stations raised their prices to reflect the capacity of their tanks. Often times $5 or more. Even with the pipeline out of commission enough tanker trucks were able to meet the demand.

When the pipe was repaired a few weeks later prices came down slightly above the national average.
If prices were not allowed to reflect market conditions none of these tankers would have bothered delivering gas and would have prolonged the agony and damaged the local economy.

Great story! Thanks for

Great story!

Thanks for posting that!

All this pathetic talk about fossil fuels..

How sad is it when clean buring fuels from our Hemp plant are illegal?? THIS is what we should be talking about here..it would be SO ABUNDANT and cheap!! Less then $2 on a gallon..and its CLEAN BURNING! and the small farmer would once again be profitable in this country! and we could tell them dirty rotton Oil Gansters to PACK SAND! When are the sheep going to wake up? When.

Cannabis Hemp Oil CURES DISEASE

I understand what Ron Paul is saying

and he's right...it's just that the title of Price Gouger never looks good on a humanitarian resume

That is why I admire Dr. Paul...

He has the "spine" to speak out the truth on controversial subjects not based if they are politically palatable but in the reality of the situation and its constitutional soundness....

A good way to defend your freedoms: www.libertymagazine.org

Is the MARKET lining up to profit from Perpetual Disasters?

We live in the age of Climate Control, Weather Modification and GeoEngineering.

What does Ron Paul say about private companies, "THE MARKET", deliberately manipulating the weather for profit and control of resources?

It's not a secret, military and commercial jets have been spraying heavy metal particles into the atmosphere for a long time. Heavy metals like aluminium and barium are key components in weather modification operations. DON'T EVEN TRY TO DENY IT? Please do your research before issuing a silly response like, "It's a wacky internet conspiracy theory".

Weather Modification ACTS have been revised... governments at the local or national level are not obliged to REGULATE companies in the business of weather modification. (If geoengineering is only a fairytale, why do we have legislation referring to Weather Modification? Why do we have companies with names like, Weather Modification?)

Investment houses on Wall Street have been created to allow betting on the weather. Evelyn Rothschild just announced a new website called MYWEATHER, strictly to allow clients to bet on the weather.

There are videos on YouTube that demonstrate, using freely available satellite imagery, that Hurricane Sandy was possibly manufactured and controlled.

What do we do, with "THE MARKET" at the mercy of big corporations with the machinery of the government at their fingertips?

We know that companies have been profiting from perpetual warfare. Are we now looking at companies who are lining up to profit from Perpetual Disasters?

You have an honest

thoughtful question and think it is worth considering.

Prepare & Share the Message of Freedom through Positive-Peaceful-Activism.

Cosumers "vs" Suppliers

It is consumers' job to resist higher prices by cutting back or not buying.

It is Suppliers' job to try to grab market share from their competitors, by making more buyers happy. One way they do this is to offer a better price than their competitors, or, in some cases, by having gasoline for sale when the others don't.

It's a natural, mutually beneficial relationship, called a "free market."

It results in the best price and the best supply.

What do you think? http://consequeries.com/

High prices would not have reduced demand

Having lived through this personally many people would have paid any price to fill up their gas can or tank. Only a few gas stations were open and when you don't have power for days and need gas for your generator, price is not an issue

Yes it is, being in NJ during

Yes it is, being in NJ during the time of the storm I can assure you, people who didn't need gas were still lining up to get even a 1/4 of a tank or gas cans when they had no generator. People were in a frenzy and seemed to believe that if the don't get gas asap they never will. There is no doubt that high prices would have prevented these people from creating an even worse problem and instead waiting out the shortage as long as they could.

Commerce with all nations, alliance with none, should be our motto. - T. Jefferson rЭVO˩ution

"Everyone wants to live at the expense of the state. They forget that the state wants to live at the expense of everyone.” - BASTIAT

Really?

People showing up with gas cans without a generator? I doubt this was the majority.

The issue you seem to neglect is no one knew when they could get gas. I filled-up my tank prior to the storm, yet three days after the storm I was down to half a tank. By this time many gas stations were closed and those that were open had long lines. Sure I could have waited until I was down to a 1/4 tank but what if the problem still persisted?

The problem those of you seem to forget is when a product is a necessity price won't matter. Think about it. If there was an extreme shortage of food and after several days you've had nothing to eat would a higher price quell your urge to eat?

Right, no one knew, but that

Right, no one knew, but that did not change the fact that people were getting gas when it wasn't necessary because they didn't know when they could. I waited without a problem. I did not do any unnecessary driving, and conserved the gas I could, knowing that most of the country was unaffected and our area was a major sector of the country so the gas lines would not last for months. It was your choice to wait in the line even though you could have waited, I was down to a 1/4 of a tank myself and waiting and then it was over and I still lived, amazing!

Gas is only a necessity when you have to drive and it's almost gone. Relating this to food is a silly diverge from the actual problem. We do not need gas to live, gas is a commodity and without we would find other sources of energy. I'm not sure if you remember but the world did not always have gasoline and people survived quite alright.

But what the hell...if price controls were set on food to below their market value and their was a shortage, it would be gone much faster then if it was at market value. Secondly, production of food would continue to drop off massively because producing food would not provide a sufficient enough return to make a food production business sustainable.

Commerce with all nations, alliance with none, should be our motto. - T. Jefferson rЭVO˩ution

"Everyone wants to live at the expense of the state. They forget that the state wants to live at the expense of everyone.” - BASTIAT

If there was an extreme

If there was an extreme shortage of food and after several days you've had nothing to eat would a higher price quell your urge to eat?

So a higher price wouldn't quell your urge to eat, but price controls would?

What about a farmer who needs food for his animals?
With low prices he buys the food and feeds his animals while you suffer from hunger.
With high prices, however, he will probably wait until the supply recovered and prices came down.

Only because you can't imagine why and how somebody doesn't buy it at a higher price, this doesn't mean it's not going to happen. That's why central planning always fails! Because your knowledge is limited and can't compete with the free market.

And what if the price is so

And what if the price is so high that you can't pay it? Or you can pay it but meanwhile have to abstain from food because you've got nothing left?

There is always somebody who doesn't buy it anymore if prices rise. In this case, especially corporations which produce things whose demand isn't affected or even reduced by the disaster.
This companies mostly will first use their reserves and wait until prices fall before buying more, because otherwise they would lose money.

What's the matter with you

What's the matter with you downvote trolls here?

You are not able to express where I am wrong, so you just downvote me because you don't like the fact that your reasoning is nonsense?

It is sad seeing so much people here disagreeing with Ron Paul and Austrian Economics. I mean you are advocating PRICE CONTROLS here! On a site that says to be about liberty! What in the world happened???

Why did you support Ron Paul if you don't agree with his message? Did you really support him? Or are you just brainwashed liberals who supported him only because he stands for peace?

I have more and more the feeling that his whole message gets distracted by people who don't understand liberty and even never fully understood him.
If you don't get back on track this movement will not last. It's being dissolved into the whole mess we already have.

My problem with price gouging

My problem with price gouging is that I feel that in a situation like Hurricane Sandy, it is a product of corporations.

I feel that in a society with more smaller businesses, you would see gas station owners and gas producers selling it at cost because it is the humane thing to do. Humanity, morality, would come into the play. Moreover, if you owned a gas station and charged 5x the normal price because supply-and-demand said you could, would you be able to walk in public without getting scorned?

But corporations have no morality. Their only goal is the bottom line. So they price gouge, because they can, and we're the worse off for it. Not at all their fault, but still.

Plan for eliminating the national debt in 10-20 years:

Overview: http://rolexian.wordpress.com/2010/09/12/my-plan-for-reducin...

Specific cuts; defense spending: http://rolexian.wordpress.com/2011/01/03/more-detailed-look-a

While you are whining out in the lot about the greedy gas owner,

other people will be in the office offering to pay double the price for the priviledge of moving to the front of the line.

A few years ago there was a shortage of housing in the SF Bay area in California. My sister listed a house and people were offering more than the asking price in an attempt to just get one. The supply couldn't meet demand so the price went up. She sold for thousands more than the asking price. Was she gouging the new owners?

Markets seek equilibrium. Equilibrium means fairness. Sometimes equilibrium comes fast - like the storm that caused the demand in the first place.

When there is a gas line, an auction will form. Even if there is an armed government agent preventing the gas station owner from selling at a higher price, there will be people flagging down the full cars and offering to siphon the gas to trade for what the market will bear. Middle men will get to work buying and selling the gas, thus providing a service for others, and a black market is formed. No, scratch that, a FREE market is formed.

Situational Problem

Many of these hard-hit areas are poor people. They may have very little gas in the tank to begin with, and may not have available funds to get gasoline at the higher price; heck, they're still having trouble with the current prices. So while I understand the market-distorting effects of price-fixing to prevent gouging, my purpose is to keep people as the first priority, not money. The money will work itself out. But people in need with real emergencies with little access to begin with and little resources need to be extended credit (if not mercy). Remember, money is to serve the people, not people the money.

Consider this quote from Isaiah 55:
"Come, all you who are thirsty, come to the waters; and you who have NO MONEY, come, BUY and eat! Come, buy wine and milk without money and without cost."

God is not being market-efficient, is He? He's being generous and looking out for the people who just don't have it. So I disagree with Dr. Paul here.

I am one of the co-founders of the Christian game design studio Renewal Corporation. For our philosophy and upcoming product updates, please see our blog: http://renewalcorp.blogspot.com

The Isaiah 55 quote

is a metaphore for something else; it is not referring to the actual buying groceries with no money.

Free markets lead to prosperity

Prosperity leads to charity and charity leads to community.

That $X gas price wouldn't last long in a free market anyway. If the market didn't have so many regulations about transporting and selling gasoline, someone with ambition would load up a trailer of cheaper gas and transport it and sell it for $X-1. The supply would increase and everyone would be able to get more gas for less money faster. Price fixing leads to just the opposite of what you want, if I'm understanding you correctly, and what you want is equal access to gas for the poor. Fix the price low and the poor will get no gas because the rich can afford to out bid them. The rich will also bid on more than they need because of the preceived shortage, leading to a longer shortage for the poor. Let the market behave as it should, and the poor will get cheaper gas faster as entrepreneurs respond to the opportunity. Charity givers will be able to buy and give more gas to the poor due to the lower price.

Another way to look at it is, nature seeks equilibrium as part of the Creator's design. Humans trading freely for mutual benefit is natural. Price fixing goes against nature.

Your quote has nothing to do

Your quote has nothing to do with the subject. It is voluntary benevolence what Isaiah says.

What the government does on the other hand, is forcing other people to be "benevolent".

I think the problem which you don't get is that there is not enough gas for everybody. No matter what you do, the gas supply can not be increased by the government or benevolence. This can only be done by increasing productivity.

So do you want a bureaucrat in Washington to decide who gets gas and who not or should not better the people decide for themselves how to divide it?

Of course RP is correct

If (and only if) we assume that "gas and oil" exist as consumptive goods, with an origin in a free-market.

They were not, however, born (as consumptive goods), in a free-market -- they were born (came into commercial use) in a highly regulated / wealthy-shifted economy.

If we had a truly free-market going back to 1790 I don't think we would have (for very long anyway) pursued oil/gas from crude.

The infrastructure to force an industry like that into commercial use is similar to the railroad -- you must force/kill/disease a lot of indigenous people -- pollute rivers -- kill off millions of migratory animals.

To do all of the latter you must have those lands in the commons (under gov't control) -- the cost to buy (at fair market value) those lands from the indigenous would have been in the billions, even way back then.

Alright, so, for example,

Alright, so, for example, there is strong evidence that the Koch brothers intimidated and bullied Native American owners of lands with oil on them so that they could first drill there, and second drill there with little to no royalties. Of course the Koch brothers deny this (the fact that they didn't pay promised royalties is iron-clad), but let us assume it is true.

What should the government do? What is their proper role here?

Plan for eliminating the national debt in 10-20 years:

Overview: http://rolexian.wordpress.com/2010/09/12/my-plan-for-reducin...

Specific cuts; defense spending: http://rolexian.wordpress.com/2011/01/03/more-detailed-look-a

You have to go back the first wrongs of gov't -- then meditate

on what would have been in existence (as a market good -- something that can logically be made and purchased in a free-society given the era) and determine if crude-oil-gas-coal-steel would have developed at all or only in part (some percentage greater or lesser than we have today -- as crude-oil-gas-coal-steel "market goods"); then after you determine that you will know what the right role of gov't is moving forward.

The problem with gov't correcting "downstream" evils, long after the path of capitalism-corporatism-socialism is adopted, is one of degree.

Reparations create enemies -- No-Reparations creates victims (victim mindset -- an understandable "disease").

Look how disastrous welfarism and reservationism were, as policies after-the-fact.

In the Koch situation I would say let them keep 10 cents for every dollar they have in asset-form -- the rest of it goes to those they wronged directly and back to the taxpayer who was wronged indirectly.

But we'd have to do that for every rich person, rich organization, and rich union in the nation. The cost of which would probably strip 50% of the value.

Koch

I'm not familiar with this particular story, but if it can be proven that they threatened the use of force (fraud is force), then they should go to court of it, and, if convicted, pay a large fine, return the ill-obtained and possibly be incarcerated depending on the severity of the threat and amount of damage done.

This is, of course, assuming that they did threaten force and that there is enough evidence to prove beyond reasonable doubt.

*Note: My perspective is a "minarchist" perspective. In other words, I believe in the non-aggression principle to an absolute but I believe that government should exist in the form of a military, a police force, and a court system. Others here, such as anarcho-capitalists, are likely to express disagreement.

Do Austrian economists even

Do Austrian economists even believe in supply and demand?

Plan for eliminating the national debt in 10-20 years:

Overview: http://rolexian.wordpress.com/2010/09/12/my-plan-for-reducin...

Specific cuts; defense spending: http://rolexian.wordpress.com/2011/01/03/more-detailed-look-a

Economics time!

Yes, of course. Supply and demand are at the heart of Austrian economics. The solution Dr. Paul proposes here basically amounts to "stop the government interfering with supply and demand." Essentially, the shortage here is resulting from the government preventing price from rising to reflect supply.

Right now, what is in place is called a price ceiling. A price ceiling is a government initiation of force that sets a maximum price and which a product can be legally sold. What basically happens is that the ceiling prevents the free market from reaching its natural equilibrium price and quantity. The equilibrium is basically where supply and demand are equal, and therefore everything that is produced is (in theory) consumed. When a price ceiling keeps the market below the equilibrium price, this causes the quantity demanded to exceed the quantity supplied. This results in a shortage, which is why we were seeing lines at gas stations.

The price ceiling can basically be illustrated by this diagram: http://img.sparknotes.com/figures/0/039bab1e6f1ef2a65b5f4c8d...

The blue and red lines symbolize supply and demand, respectively. The point at which the lines cross is the natural market equilibrium, where everything produced is consumed, and there is no excess supply or demand. The black horizontal line that crosses the supply and demand lines symbolizes the price ceiling. You can see that on the horizontal line that is the ceiling, the demand is further to the right than the supply, which illustrates demand exceeding supply. The distance between the supply and demand curves on the line of the price ceiling is the amount of shortage.

How do we solve this situation? Well, as Dr. Paul says, price ceilings (as well as their counterpart, price floors) should be ended. In this scenario, the price of gas will naturally rise to the equilibrium. Since the price is higher, the will be less demand. This will get rid of the lines. Since gas prices might go up to, say, $15/gallon (just making up a figure, I don't know what the natural price would be in this particular situation), people who do not necessarily need gas will not buy it, but those to whom it is important will pay the price. Yes, not everyone who WANTS gas will get it, but the same is true with the government setting price, except that in the authoritarian version, the gas goes to those who get to the station first, while in the capitalist version, the gas goes to those who are willing to pay for it. In the opinion of libertarians, this is more fair than the controlled system. Also, it does not require violation of property rights of gas sellers. This is true without even MENTIONING the fact that few companies will truck gas in to get $5/gallon, but a lot more would be inclined at $15/gallon. This would cause a natural growth in supply, which would then naturally decrease prices as the emergency situation came to an end.

I'm sorry if you already knew the stuff in this post and it came off condescending, but you asked how supply and demand apply to Austrian economics, so I felt it necessary to give a primer as to how supply and demand apply to the situation by describing the nature of free markets.

If you are indeed new to economics, I recommend having a basic grasp of supply and demand (essentially what I described in this post) and then reading the book Economics In One Lesson by Henry Hazlitt. This is available from the Mises Institue (https://mises.org/store/Product2.aspx?ProductId=33) and it can also be obtained on iPad (and probably Kindle). Hazlitt explains economic fallacies commonly espoused by Keynsians, socialists, and other forms of statists and disproves them through economic logic.

I am well aware of economics.

I am well aware of economics. My question was if the Austrian economists believe in it. I guess that they do.

Other than the federal gas tax and subsidies, is there a price cap on gas (in regular situations) set by the federal government?

Plan for eliminating the national debt in 10-20 years:

Overview: http://rolexian.wordpress.com/2010/09/12/my-plan-for-reducin...

Specific cuts; defense spending: http://rolexian.wordpress.com/2011/01/03/more-detailed-look-a