what do you guys think about the term 'gouging'?

Discussion in 'Economics' started by olias, May 27, 2011.

  1. olias


    Do you think it's fair for anyone to accuse a business of 'gouging' it's customers? I see a lot of politicians accusing the gas companies of gouging customers at the pump, but aren't they entitled to charge as much as they can to maximize their profits? If they charge too high, people will stop buying from them. They also have to compete with one another (unless they are in collusion which would be a whole different story).

    Do you think the politicians are just scapegoating?
  2. LeeD


    First, yes. They are seeking to assign blame... and some are trying to divert attention from other factors that contributed to increase in pertrol prices... such as speculators buying oil and storing it offshore on ships in expectation of further price increase.

    Second, those politicians are right. "Gouging" always happens when prices grow fast in a volatile manner. For retailers it's just simple business sense.

    For a gas station owner very substatial capital is locked in the petrol stored at the station. Imagine the gas station sells the petorl at the cost plus reasonable surcharge. When the petrol is sold, the owner needs to replenish the stock. If the petrol price has grown substantially since the owner bought the petrol the last time, the money received from selling the petrol may not be sufficient to buy the same amount of petrol at the increased price to fill the gas station. So, when setting the price the gas station own tries to factor the maximum concievable increase in petrol price so that he/she can simply afford to replenish the stock.

    Some may think of it as reckless profiteering but consider that a large part of the "profit" is locked in the petrol that is stored at the station.

    Further, you may ask how often gas station buys petrol. Maybe once a week. If you consider average weekly increase in the cost of petrol in the last, say 5 years, it seems the "risk premium" (surcharge in case wholesale price of petrol grows) should be insignificant. However, think of oil futures as a proxy for petrol price. What was the largest weekly percentage increase over the last 5 years? That's an indication of how much "gauging" is required for the gas station just to stay in business.

    Then if you consider an independednt retailer, saimilar gouging happens at all stages on the way from oil in a tanker to the car tank. Petrol wholesaler has to gouge and the oil refinery may have to gouge too... all of that adds up to a massive margin in the retail price of the petrol :)
  3. so when we have a natural disaster like a hurricane and a business jacks up the price of water to 100 a gallon we should just let them maximize profits?
  4. olias


    that's an exception to the rule I would say. why? because you're talking about water, which people do truly need. And also because you're talking about a true emergency. In your example, I would say that is 'gouging' and would be an instance where government should step in to prevent
  5. olias


    This link didn't work, but I found the article on another site. It was a pretty thoughtful argument. I'm going to stand by my reply to Free Thinker, but I need to consider it some more. Perhaps we should simply let gouging go unabated. What that does is force new behavior.

    In the example of the water situation....if the stores jack up their prices to get as much as they can....that is going to force those who can't afford the water to find some other solution. Perhaps they find a way out to the next town where they can get cheaper water, or they invent a way to purify ground water, or they decide to drink the water they used for washing dishes that is still sitting in their sink at home. People are more likely to resort to those measures if the stores are 'gouging'. and let's face it the stores are now faced with impending shortages, so it's not unreasonable that they would mark up those prices.
  6. What would likely happen is stores would lay in extra supplies of water in anticipation of being able to sell it for windfall profits. This is how a free market functions and why they are inherently more efficient than a planned economy.

    Anytime you hear a politician complaining about "gouging" or moaning about the need for "affordable" housing or the necessity of paying a "livable" wage. you know you are listening to either an economic illiterate or a demagogue.
  7. Yes.

    Otherwise you've created an indirect tax on people who actually prepare, which is a moral hazard in and of itself.
  8. GTG


    If they don't do this, then you're going to have shortages in the aftermath of a disaster. I remember reading a story where during one of the recent hurricanes there where 2 enterprising men who spent several hours driving to another town that was not effected by the disaster, and purchased ice-chests and ice. They filled up the pickup and brought it back to their home town and proceeded to sell it at outrageous prices. People started complaining, and eventually a sheriff deputy pulled up and said they couldn't sell their ice for more than say 2.50 or so a bag, because they were breaking the price-gauging laws. So the consequence is that these guys stopped making the long trip to go buy ice, and the members of their community had to do without ice for several days until electricity was restored or make that trip to buy ice themselves. How was anyone helped by stopping this "price gauging"?

    The fact is that during a disaster many basic commodities become extremely valuable to certain people. If the price is not high those people will not be able to get those commodities at any price. For example, to someone who has diabetes, a bag of ice to keep your insulin from spoiling when there is no electricity for refrigeration could be worth several hundred bucks easily, but if the only ice available is forced to be sold at 2.50 a bag, then that life-saving ice that the diabetic NEEDS, will end up being purchased by people who don't need it as badly, and there will be none left.

    Price isn't only about ensuring profits for sellers, it also ensures that consumables get used for the purpose which has the highest utility. So back to the example, someone who otherwise might purchase 10 bags of ice at 2.50/bag to fill their bathtub up, so that they can keep their feet cool until the electricity and air-conditioning comes back on as well as to keep perishable food from rotting, otherwise only buys 1 bag when ice is at $25 per bag...just enough enough to keep their perishable food from spoiling....ensuring that their is enough ice left for when the diabetic needs to buy ice to stay alive.
  9. LeeD


    I could follow the original link alright. No problem.

    However, I think high petrol prices are not a "catastroph". Expensive petrol is there to stay. So, if a specific industry (such as gas stations) makes excessive profit, it's not price gouging, it's a cartel or collusion.
    #10     May 27, 2011