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Shortages can have worse effects than you thought

The gasoline shortages in the Sandy-ravaged areas of New Jersey and New York may be worse than you may have thought.  While New Jersey has turned to odd-even days at gas stations, their shortages are still severe.  Scrapping the misguided anti-price gouging laws would cure the shortages, but it does not look as if people are going to repeal those laws.

In class, we talked about how, during a shortage, the ones who own the items in short supply are in great positions to exploit their advangates over others who are looking for the item.  But consider bad things much be if those who  have gasoline are exploiting those looking for gasoline if they think they can get away with this:

http://newyork.cbslocal.com/2012/11/06/sandy-gas-woes-continue-people-trading-gas-for-sex-on-craigslist/

Is this really better than allowing sellers to price gougle.

-MC

6 Responses to “Shortages can have worse effects than you thought”

  1. Darren says:

    I think that the anti-price gauging law is good. Considering that people were willing to have sex just to acquire gas, The lower price in the short run will benefit the consumer in allowing them to have more purchasing power (money) to afford other necessities in this time of crisis. But since this is an economic forum, a decrease in supply should automatically increase the price. Gas stations should increase the price till the market demand and supply equal out.

    • morris.coats says:

      Darren, remember that your purchasing power is not enhanced when prices are kept down by law. Instead, your dollars have no power at all to buy something that cannot be had. The increase in price gives the suppliers an incentive to produce more for the buyers. How are people helped by being denied things many people see as necessities. Imagine that this is food, instead of gasoline. Are people better off with low prices for food that is not there and starving than they are if they pay a little more and are able to get the good and do not starve?

  2. Mindy says:

    I know that people are more likely than not pay the price for fuel no matter what amount it is because it is a necessity. There will probably be a shortage regardless. I think it is horrible to overcharge people during this disastrous time and a time when families have lost so much!!!

    • morris.coats says:

      Mindy, necessity or not, higher prices do get people to cut back. The way you describe the demand for gasoline, it would be vertical, but that is not what is observed. The market demand for gasoline may be inelastic in the short run, but it certainly is not vertical. Study after study has shown it and every other demand to be downward sloping, meaning higher prices reduce purchases. The fear of running out also gets people to try to buy more than usual. Some people wait hours in lines to get gas “just in case.”

      Watch the John Stossel video about price gouging: http://www.youtube.com/watch?v=d52Bg8QrHQ8

      More importantly than the price’s negative effect on buyers’ purchases, the upward slope of supply curves (supply curves are not vertical either), puts a limit on how much sellers can raise their prices. Higher prices, though, encourage people to bring the item in from out of state, just as we see in the Stossel video.

      What is worse, people getting charged more than usual, or not at all getting something that you describe as a necessity? Higher prices reduce shortages every time. In the 1970s we had chronic, persistent shortages everywhere because the prices were kept down with price controls. Since we have moved away from price controls, we only have them when there are these “disasters” that bring about temporary price controls.

  3. vaughn says:

    Well they will not have enough fuel regardless of how much the price is because a lot of their refineries are shut down to produce the fuel. Everybody needs the fuel regardless of the price, it will all sell out. So the higher the price, the more income you need to buy it so if you do not make enough income then you will just have to go without.

    • morris.coats says:

      Vaughn, demand is still downward sloping, even though it may be quite inelastic. This means that price still matters and the higher the price, the less will sell. There is a price at which it will not all sell out. Income and other spending priorities will certainly limit purchases of gasoline. However, if people get in trouble for selling at a price they think they can get, they might trade it for something else, such as sex as we see in the news story linked here. If they could get a high dollar price they would not be asking for sex for gasoline (but they still might trade gasoline for money and then purchase what they are looking for from professionals). The anti-price gouging laws gives those who have gasoline to sell in a shortage plagued market other ways to exploit buyers, just as we saw with rent controls.

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