Monday, November 28, 2005

price gouging 101

While reading the Mises blog, I came across an excellent, although unsigned blog post, which tersely and yet effectively defuses the cries of "there ought to be a law"-types who think that coercion is the answer to everything, without realizing that coercion is usually the source of the problems to begin with. The one caveat I would attach is that the first argument is an ethical argument based on the premise of private property rights, and not based upon Austrian economics, but rather a libertarian philosophical grounding.

From an Austrian perspective, the notion of price gouging does not exist – the gasoline is the gas station owner’s property and he/she is under no obligation to sell it for any particular price, nor am I, as a consumer, obligated to buy... Even among those who agree in principle with market based pricing, the price gouging mentality has gained a foothold – even conservative radio talk show hosts have caught the disease.

The concept most people, seem to have most difficulty with is the replacement cost argument – the refinery or gas station bases it prices on what it expects to pay for its next delivery and not to recoup the cost of the last one. People understand that nobody will sell them 1000 shares of Google for 10% above last January’s price, or a Pacific Heights apartment for 20% above its 2000 price, and consider that this is perfectly reasonable.

Yet the same people expect a gas station owner, who paid $2.50 a gallon for the gas now selling at the pumps, to be morally bound (and in some states legally bound) to sell it for a “fair price”, $2.58 a gallon, even though the cost of the next shipment from the refinery will be $2.75 a gallon.

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