Price Gouging For Dummies

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Your brother-in-law is going on vacation for a week and wants to borrow your second car. No problem as your son is at college.

You note that the tank is full and send him on his way.

He comes back a week later and drops off the car with a nearly empty tank.

You fill up the tank with 10 gallons of gas which has risen from $2 to $3 a gallon in a week.

You ask your brother-in-law for $30 and he accuses you of price gouging.

Is he right?

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the dummies

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No. I can't think of any

No. I can't think of any way a sane and/or rational person could interpret it that way.

This is a problem of

This is a problem of incomplete contracting. If you had stipulated that he either bring it back as he found it or pay you back for the gas, then you would have avoided the conflict.

As with well-defined property rights, complete contracting eases all sorts of relationships. But they are costly, because we lack perfect foresight.

I don't think it's price gouging, because it reflects your replacement cost.

The matter of incomplete

The matter of incomplete contracting muddies the issue. Charging someone a price *after* they have used a product introduces extraneous problems. Let's reconsider the issue. You fill the car with gas at $2. Then gas goes to $3. Then you offer to lend your brother the car on the understanding that you will charge him $3 per gallon that he uses. Then he accuses you of "price gouging".

Your brother is correct. You are price gouging. There is of course nothing wrong with price gouging. It is a label of opprobrium attached to an act of selling an item for significantly higher than it was bought because of a significant change in market conditions. So, literally, it is price gouging. That is what price gouging is. It is the act which is called "price gouging". And again, there is nothing wrong with it.

Did you think this was a

Did you think this was a segmented market?
New Jersey Attorney General Peter Harvey said Hurricane Katrina showed why a national law is needed. Gasoline price spikes happened in many areas outside hurricane-ravaged regions, but many prosecutors were unable to pursue price-gouging complaints bec...

The brother example may be

The brother example may be less than ideal, like lynne said, it's a problem of incomplete contracting. I might argue that your brother didn't ask "Can I borrow your car and *keep* your gasoline?" but in any case, it can't be considered price-gouging; the gasoline in your car is identical in every way (except for its container) to the gasoline in the pump. It is also identical in the sense that it is only valuable to you if you can use it or otherwise appreciate it. To charge the replacement cost is certainly not a crime. Please allow me to demonstrate:

Had you not lent out your car, you would have a full tank of gas, and you would have spent only $20.

If you lent out your car, in order to replace the gas that you previously spent $20 on, you need to spend an additional $30. You have successfully spent $50 to enjoy the use of 1 tank of gasoline. Charging the market replacement cost simply returns you to the original position: having a full tank of gas at a net expense to yourself of $20.

If anything is price-gouging, it is your brother's refusal to replace the gasoline that he used. I don't think there is another reasonable conclusion.

"Top prosecutors agree

"Top prosecutors agree national price gouging law needed"... and in other news, mosquitoes agree more blood is needed.

"'We found retailers raising

"'We found retailers raising their prices five or six times a day,' Harvey said. "This had nothing to do with supply. This was New Jersey."

Nothing to do with supply? Then who was doing the gouging? And I suppose demand doesn't count for anything either. sheesh.

Please note that no $2

Please note that no $2 gasoline was ever bought in the problem. There is no way of knowing when, or at what price, the tank was originally filled. Nor does it make any difference.

Economic marginal costs are replacement costs, and only accounting costs care about the past.

Regards, Don

In response to the

In response to the brother-in-law who accuses me of price-gouging, I may ask him what Don Boudreaux loves to ask: "as compared to what?"

It's not price gouging.

It's not price gouging. You're not really asking for money: you're asking for a full tank of gas. A full tank of gas is exactly what what you are entitled to. If he gives you only 2/3 of a tank (i.e., $20), he is not giving back the car in the condition in which he borrowed it. Giving the car back with a portion of the gas missing is like giving it back with one of the headlights missing.

I see where I improperly

I see where I improperly inferred the $2 purchase price. Regardless, I used the $2 figure for demonstrative purposes only. My intent was to demonstrate that the sunk cost of the prior purchase doesn't really play in the equation, which Don confirmed. In attempting to do so I should've left it out altogether. You very well may have gotten the gas for free. Or you may have paid $4 for it. Don is correct in the assertion that the original price is irrelevant. A quick comparative statics shows that lending the car deprives the lender of the gasoline, which can only now be replaced at $30.

The more I think about it, I don't think there is an incomplete contracting problem. Borrower is implicitly responsible for returning the vehicle and its contents in as close as possible to its original condition. The borrower would likely assume responsibility for any loss occasioned by his negligence or accidents (flat tires, stolen stereo, broken windshield, etc.), it follows that he should be held responsible for losses occasioned directly by his use, also. Returning the car with anything less than a full tank of gas is the moral equivalent of returning the car with two flat tires.

:furious:damnit! shouldn't

:furious:damnit! shouldn't have taken so long choosing my words - Maurile snuck that in when i wasn't looking :wall:

It’s not price gouging.

It’s not price gouging. You’re not really asking for money: you’re asking for a full tank of gas.

Then there is no such thing as price gouging. You only get to charge unusually high prices in situations where market conditions allow it, e.g. in a disaster where you and, say, one other guy are the only ones around for thousands of miles with fresh water. If you and this other guy charge $100 a bottle (assume this is much higher than some background normal price), then by your argument you're not price gouging, since to replace the bottle you sell (by buying it from the other guy) you would have to pay him $100.

For "price gouging" to be in accordance with its normal meaning, you must think in terms of accounting costs, not replacement costs. It's the accounting costs that people are referring to when they talk about price gouging, e.g. the price gouging of gasoline sellers. You have to respect usage, not convenientely redefine words to suit your views.

To clarify, the concept of

To clarify, the concept of price gouging is based on bad economic theory. It's no good to say, "suchandsuch isn't price gouging" merely because according to good economic theory there isn't anything amiss. That's sort of like arguing that the proletariat aren't being exploited because [insert standard economic explanation of capitalist profit]. On the terms of marxist theory, the proletariat *are* being exploited. The correct answer isn't to play along with the terminology "exploited" and deny there is exploitation; the correct answer is to challenge marxist theory. Similarly, the correct answer isn't to say, "the guy is not gouging his brother", but to challenge the bad economic ideas that underly the very idea of "price gouging".

To simplify, if I have a

To simplify, if I have a full tank of gas, either in a car or buried in the ground, and I neither sell it nor loan it out, then in a week's time I still will have a full tank and no more or less money than I started with.

This is my reference point, a full tank and no monetary change.

It makes no sense to do something that leaves me worse off than this. To be sure that I am in fact no worse off, I must sell any gas for no less than the replacement cost.

Regards, Don

It makes no sense to do

It makes no sense to do something that leaves me worse off than this.

You are defending the action. That is consistent with calling it "price gouging", because "price gouging" is merely a term of opprobrium used to label something perfectly defensible.

To simplify even further, I

To simplify even further,

I have a full tank of gas buried in the ground and no money or credit.

If I want to have a full tank next week, I have only two choices.

1. I can refrain from selling or using any gas at all.

2. If I sell part or all of the gas in the tank, then I must realize sale proceeds in doing so sufficient to pay for replacement gas next week when the supply tanker truck arrives. This means that the price that I charge per gallon now must be equal to the price that I must pay for replacement gas next week, even though I can't know what that is in advance. If I don't set the price high enough, I will not be able to refill the tank. This will be true no matter how many state AG's in Arizona believe otherwise.

Regards, Don

Knowing your brother-in-law

Knowing your brother-in-law as a deadbeat, you should have known that he had no intention of paying for gas at any price. You should feel lucky that the car was not stolen or in some major accident and totaled, and that the radio is still in it.

Had you given the job of the arrangements to your wife, she would have been smart enough to not allow him to borrow the car in the first place. And by the way, don't even think about asking her to pay for the gas.

You are not gouging. Your

You are not gouging. Your brother-in-law is acting like a wanker. He is taking you for a ride and not doing the decent thing and filling up the petrol tank.:stupid:

If I sell part or all of the

If I sell part or all of the gas in the tank, then I must realize sale proceeds in doing so sufficient to pay for replacement gas next week when the supply tanker truck arrives. This means that the price that I charge per gallon now must be equal to the price that I must pay for replacement gas next week, even though I can’t know what that is in advance. If I don’t set the price high enough, I will not be able to refill the tank.

And if you do so, if you bought the gas for significantly less you'll be price gouging. And yes, it *will* seem unfair to certain kinds of people - namely, people who go around complaining about "price gouging".

Constant, Every time you see

Constant,

Every time you see the words "price-gouging", just think "pricing for replenishment and assuring future supply."

Regards, Don

Don, That would misinterpret

Don,

That would misinterpret the economic illiterates who use the term "price gouging" to complain about high gas prices. They are not thinking in terms of pricing for replenishment, and therefore it is inaccurate to interpret their words that way.

Constant, Why would I be

Constant,

Why would I be interested in interpreting the words of dummies? It is more important to sterilize the effects of their misconceptions.

Regards, Don

Don, You just got done

Don,

You just got done telling me how to interpret the term "price gouging". I'm telling you that your recommendation is wrong, because that's not what it means - it means something dumb (pricing more than it was bought for), not something smart (pricing for replenishment). It's a dumb concept. I think you're going about this all wrong. The problem with asking the question you asked ("You ask your brother-in-law for $30 and he accuses you of price gouging. Is he right?") is that it treats the concept "price gouging" seriously, since it employs it in the question. The concept can't be sterilized at the same time it is being ernestly employed, as it is in your question.

Constant

I don't think the common

I don't think the common definition of "price gouging" is as simple as you make it, Constant. While the normal person may not think about replacement vs. accounting costs, what they are concerned about is unfairly profiting at someone else's expense. Yes, they mistakenly believe that any raise in price means a raise in profits, but their definition of price gouging deals specifically with the profit and the raised price to them is just an indication of that supposed profit.

In the case of a tragedy such as Katrina, these people believe that any profit is exploitive. In fact, anything not close to free is considered exloitive because of the unusual conditions.

As for the 2 brothers, even by common parlance I don't think you can call it price gouging, as the first brother gains nothing. However, let us assume that the price of gasoline dropped to $1 a gallon in that same week. If the first brother asks for $10 to replace his full tank, then there is no problem. However, if he asks for $20 then he could be considered to be price gouging, as he gets his full tank plus a $10 profit at his brother's expense.

People don't think about replacement costs as they're generally not aware of them. When explained to them, they are almost always willing under normal conditions to wipe them out of the equation, even in the case of the big, bad gas stations. They will however, continue to complain bitterly if even 1 "extra" cent is gained.

In the case of a tragedy

In the case of a tragedy such as Katrina, these people believe that any profit is exploitive. In fact, anything not close to free is considered exloitive because of the unusual conditions.

But is that belief a reasonable one? I don't find the concept of "exploitation" to be very coherent when used by leftists for these kinds of situations; if it's ok for prices to be whatever the producer and consumer agree upon, then the concept of "exploitation" doesn't seem to mean anything.

But is that belief a

But is that belief a reasonable one?

No, of course not. My only point was that the common use of "price gouging" is is directly linked to the belief in "unfair/exploitive profit" and not to the raise in price itself. The definition of unfair profit changes depending on the situation, and since much of the recent talk about price gouging centered around Katrina, I gave what I saw as the definition of unfair profit in that case. Constant says the brother example is price-gouging in common parlance, and I say it's not quite unless you think it's unfair/exploitive to ask someone to replace the gas at all (it is a little gauche), whether they do it themselves at the station or give you the money directly.

Too late to make a

Too late to make a difference I'll throw in my two $10 bills. Contracts between family members can't be written on paper, but they're always in blood. Chalk it up to, "what comes around goes around."

The brother is trying to get something for nothing (no big surprise based on initial behavior), and you've learned a lesson (a little too late... since you've known him for how long?).

You're both even, and get to argue it out with mom and dad over the holiday dinner. I say given the story, that you get the moral high ground since whatever the price of the gas, you gave him a great deal! He couldn't rent any car in the US for a week+gas for $30, not even an old broken down heap. Even at 15mi/gal and 10 gal he's run through a good 150 miles in that week at a very conservative $0.30/mi he owes $45. Note that the IRS allows deductions of $0.45/mi. Let's not forget your time and effort giving him the keys, refilling the gas, not to mention liability.

You would be a saint for asking $50 had you done so up front, and all he can say now is you didn't tell me before I borrowed it, like he didn't tell you it would come back empty. OK fine you did tell him it was full when you lent it and that implies you want it back that way in my world of familial conduct. Let's not get into straw men, since I suppose he could return it with bullet holes from a bank robbery, and since that wasn't in the original contract (ie normal wear and tear) expect you not to ask for reimbursement.

Just be glad there wasn't real trouble, and never lend anything to family (or friends) unless you'll still be happy (and friends), if they lose it. My familiy is worth more than any consumer item (or any I'd be handing out), and I figure it's the same for you.

Of course you could just ask for way too much extra money, up front, the next time he _really_ needs a favor (other familial obligations are a good time). Then you _would_ be price goudging, he'd get a feeling what it's really like, and everyone learns something.
:argue: