Thursday, September 21, 2006

Becker on Price Gouging

Given what we have been discussing about supply and demand the past couple of weeks, here is an article in defense of price gouging by economist Gary Becker. One key part on the refineries last year damaged by Katrina:
On the other hand, profits have increased to operators of refineries that were not damaged by Katrina because the damage to Gulf oil refineries raised the wholesale price of gasoline, the main product of refineries. However, the higher prices and greater profits induced undamaged refineries to squeeze greater production out of their limited capacity, and companies hastened to repair the refineries that were damaged to cash in on the high prices. In fact, many were repaired in a remarkably short time. If price were not allowed to rise, profits of undamaged refineries would have been reduced, but the supply of gasoline would have increased at a slower, probably much slower, rate.
He also discusses later in the article that he thinks that price controls are also not necessary in developing nations when they face a catastrophe, which is a more controversial stance. Any thoughts on that after reading his argument? Any cases that we did not discuss in class where you think price controls are valid?

(Source: Greg Mankiw's Blog)


Anonymous said...

When dealing with developing countries i think that this is actually a good idea. First of all the country is developing, and it is well understood that compitition fuels development and advancement. If a price control were placed in one of these countries there would be no reason for the companies to produce as much of a good as they can to satisfy a want. If a hurricane goes through a developing country and destroys factories in order for businesses to start making money and to get back on their feet, not to mention satisfy everyone's demand, they need to not have a price control. They need to be selling and producing at equilibrium in order to find the fastest way back to stability.

As for the oil refineries it only makes since that they would want to make as much money as possible. If a price control was in place they wouldn't be as quick to restore themselves to maximum effectiveness. In general all of these examples help to prove that price controls in the long run are just a waste of time and do not benefit society as a whole.

Price controls are only valid for a short period of time. There is nothing i can think of that could possibly benefit from a price control. Ok, well, maybe if recreational drugs were legal, then for the good of society there would be a price ceiling really low causing a massive shortage of drugs. Thats pretty far out there but thats all I could come up with.

-james c

Anonymous said...

While I agree with James that price controls only help in the shortrun, I also feel that allowing price gouging is not necessarily beneficial to society. If the government were to sit back and allow people to gouge prices, then money would become less distributed. If you look at England and its colonies in the 1700s, price gouging was not benficial to society, because most of the money ended up in a few people's hands. There were a few rich people, those who gouged prices, and many poor who had to pay high prices on things that they needed.
-chris g.