Posts by Ben Winters
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OnPoint: On Price Gouging, in reply to Dismal Soyanz,
Dismal
It’s not a supply side issue. Knowledge of price differences would be pretty hard to disseminate. And supply is pretty inelastic as well given the short time-frame we are talking about.
Why not? An arbitrageur need know only two things: a) the going rate for petrol in Christchurch, and b) the rate in a nearby town. These are discoverable even in a crisis. The arbitrageur would also need the means to get petrol from A to B. Why can't supply start arriving within an hour, or a day, of the quake from someone who happens to have the necessary equipment? Surely you're not arguing supply isn't relevant to solving a shortage?
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Sacha - what part of Crampton's argument does not hold in the real world? Is it not common ground that there is a temporary shortage? Is it not common ground that quantity demanded for goods, even petrol in a crisis, is decreasing in price? is it really so hard to believe that a better way to allocate a scarce resource is to let its price temporarily increase and to then target cash assistance for those in genuine need and affected by that price increase? I see little that is hard to believe in these propositions.
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Terence W
1. If people are behaving irrationally now (petrol hording when long run shortages are unlikely) what’s to make him think they’ll respond rationally to price signals?
There is nothing irrational about hording in shortage - quite the opposite. If people anticipate future shortage then hording now is an obvious response.
3. It ignores flow on effects – i.e. all of a sudden it’s a lot more costly to go and help people. Which is obviously bad at a time when so many people are dependent on the help of others.
I'm sure Crampton is fully aware of this. You are quite correct that a potential cost of raising the price of petrol is that less help will be offered using vehicles, because they are more costly to run. A part of the argument for efficient pricing is, however, that for each litre of petrol not used on help, the gas will, on average, be redistributed to other uses of even higher value. The other part is on the supply side: raising prices can get gas from out of town where it is cheaper and plentiful into town where it is more expensive and in short supply and most needed.
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Keith I like the first three paragraphs of your post. But your argument from then on is unconvincing. If I can paraphrase your argument: "Nonprice rationing is efficient. The end." You believe in this so much you'll even punch somebody. Colour me unconvinced.
First hording occurs because people can see the market is not being allowed to clear and they correctly foresee shortage occurring. You correctly explain this phenomenon in quoting Crampton but then incorrectly say it is due to insecurity. This is quite wrong. People horde anything, including toilet paper (Soviet Union), when getting more means queuing for hours or going without.
Second, you argue petrol is special in some sense because it means security. No doubt this is true for some people, not others (public transport is still going, there are cabs, and flights out of town for $50). But there is nothing about security that is not captured in the demand for petrol. You argue that makes petrol demand inelastic, and if allowed to go free the price will rise enormously. How do you know? I doubt it very much. Unaffected petrol stations are operating just west of Christchurch last I heard. The roads are so bad I imagine a lot of people don't want to, or can't, drive anyway.
You wisely note at the start that the problem is not that Crampton is evil, but that there is a rationing problem, and he simply prefers price over non-price rationing. I don't believe affordability is generally the main constraint for most people - the situation is temporary, everyone knows petrol is on the way, many people demonstrably can get by without their cars even at current underpricing, and those who would be genuinely priced out of the market by $4 petrol and who really need their car and who can't do it any other way - isn't direct government aid or charity a far more efficient way to help than to misprice a key, perhaps the key resource, for the entire city in crisis?
The fundamental mistake you are making is to see price increase as immoral or opportunistic, rather than the automatic and fundamentally useful response to shortage. As you correctly note, there is a genuine shortage problem to be solved here - the petrol has to be allocated somehow, and I am not persuaded that all the people in those 1km lines for gas were the most needy in any sense. Again as you note - they are the people more likely than average to have the time and flexibility to queue, which probably is unrelated at best to their need. I rather suspect the people really in crisis, and there are more than a few, have better things to do than wait hours in line for gas. Even if this is only partly correct, then nonprice rationing is probably second best, especially is government aid and charity is able to help the people in genuine need and with a cash shortage.
You don't consider supply side effects either, but they are obvious: petrol at $4/litre in the city is going to attract people who can buy it for $2 in Darfield or Ashburton or Kaikoura who then drive it into town and make a tidy profit and help alleviate the shortage and cap the price spike.
I'm disappointed and mildly surprised so few commenters seem to subscribe to this view. It is entirely consistent with compassion and being human to argue for the allocation mechanism that gets an important resource in short supply to where it is most needed. Keith you put all the fundamentals in place, and them abandon them to assert but not show the merit of nonprice rationing.