People Are Weird

In the weeks following Katrina, gas stations in Atlanta remained open, but many were not selling gas. Those that were sold out removed the prices from their signs and put yellow tape over their pumps. Those few stations that were selling gas often only had premium available, and were charging upwards of $4/gallon, if not more.

None of this is surprising. The governor of Georgia, Sonny Perdue, quickly issued a statement condemning "price gouging" and promised to investigate and prosecute any incidents of this vicious crime.

This answers the economist's initial question: Why would there ever be a shortage in the absence of price controls? Answer: the anti-price gouging rhetoric had the same effect as a price control. Rather than raise prices to match the increased demand and decreased supply, many gas station owners found it in their interests to not offer gas at all.

What is surprising, to me at least, is why anyone would prefer this state of affairs to the alternative. Were gas stations permitted to raise their prices, we as consumers would at least have the option of spending $5 or more for a gallon of gasoline. Instead, we were deprived of this option altogether. How does that make any of us better off?

This is a flaw in human psychology. During times of crisis, we have a tendency to ask, qui bono? Who benefits? We have an emotional need to blame someone, and those who seem to profit off the misery of others are as good a culprit as any. And since gas station owners who charge more than the usual market price appear to benefit while owners who are sold out do not, we get angry at the former and not the latter. Yet who wouldn't rather have the option of buying expensive gas over no option at all?

People are weird.


Update: For Carnival of the Capitalists visitors: check out Patri Friedman's interview with economist/author Tim Harford here.

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If Eddie’s right, then,

If Eddie’s right, then, about there being any gas stations that “just ran out,” it’s not because the owners didn’t want to stand outside next to each customer, re-contracting every 30 seconds for the price of gasoline as it became more scarce; it’s becuase customers would likely never come to that store again once the whole Katrina scare died down.

Gas station price signs are made of magnetic integers on a metal backing. That is very much the achievement of the dream of the Coca Cola people who wanted a machine that hiked prices on hot days. So, customers may expect Coke prices to be constant, but they expect gas prices to fluctuate from day to day. Gas stations never did have a reputation for constant prices, so they have no reputation to lose.

This answers the

This answers the economist’s initial question: Why would there ever be a shortage in the absence of price controls?

I'm against price controls (explicit or implied) as much as the next anarchist, but come on. Shortages are possible even without price controls - anything short of a perfectly efficient market can suffer from misallocation in the face of uncertainty, particularly when there are significant disruptions in the normal patterns.

There's neither price controls nor anti-gouging rhetoric about bread and milk, but you still see the store shelves cleaned out at the first hint of snow or ice on the ground in Atlanta. There's any number of reasons why retailers don't adjust their prices minute-by-minute to ensure they capture the maximum possible value from their inventory as it's depleted. Friction like that is enough to cause some stores to sell out - but since different retailers will have different frictional constraints, some will sell out and others won't. That's what I saw with gas around here; some stations had gas, others didn't.

Channeling Arnold Kling?

Channeling Arnold Kling?

Eddie, Short term shortages

Eddie,

Short term shortages may be possible, but medium to long term shortanges are not. These gas stations were sold out for weeks. Surely they could have refilled their stocks in a matter of days, if not hours, if the price was right. But the price wasn't right, because of the price control effect of the anti-gouging rhetoric.

Respectfully, Micha, I doubt

Respectfully, Micha, I doubt that ceteris paribus, even short-term shortages are possible. I'm sure, for example, that grocery stores would love to have some mechanism in place that automatically causes the next-to-last bottle of milk to be priced at $7.00 and the very last bottle to cost $12.50. (Or whatever.)

But they don't, and it's not hard to see why: on any given day such a pricing practice might maximize profits. But over the long run, it would really tick off customers. And stores can't risk this negative reputational effect.

Witness furthermore Coca-Cola's attempt to design vending machines that jacked up prices for a soft drink on hot days. From what I understand, they withdrew the idea amidst grumbling on the part of the consuming public. The inevitable result will be that on hot days, some vending machines will run out of Cokes. But apparently, the market prefers this scenario to one in which consumers are charged by degree Farenheit.

So, I think that even short-term shortages might be a reaction to price-gouging laws, by which I mean the unwritten, internal laws that customers carry into stores with them and that retailers violate at their own risk.

If Eddie's right, then, about there being any gas stations that "just ran out," it's not because the owners didn't want to stand outside next to each customer, re-contracting every 30 seconds for the price of gasoline as it became more scarce; it's becuase customers would likely never come to that store again once the whole Katrina scare died down.

Oh - and not to puree the ol' dead horse, but I just thought of another example: What are the chances that quality restaurants don't know that there's going to be a 45-minute wait on Friday night? Next to zilch, of course. And yet, you'll never see them hiking up menu prices so that this form of shortage goes away. For whatever most un-Randian reasons we have, we consumers just don't stand for that kind of shenanigans.

you're back? ! yay.

you're back? ! yay.

"a gallon of milk" is

"a gallon of milk" is actually a bad example, because milk prices are highly regulated both at the retail and the wholesale level. Google on "milk marketing order" or "milk marketing board". Prices are set by government fiat allegedly in order to guarantee a continued safe supply. The laws mostly set a high minimum price; it's against the law to discount milk. I'm not sure to what degree increasing prices is allowed, but it is definitely not an uncontrolled (or merely controlled by consumer expectation) market.

This is why when supermarkets offer discount coupons they always exclude dairy products (and alcohol, and cigarettes) if you read the fine print.

The Latin phrase is "cui

The Latin phrase is "cui bono," not "qui bono."

This seems to tie in well

This seems to tie in well with what evolutionary psychology predicts. We are not entirely rational beings and we have a predisposition to accept the 'normal' price and see any variation as somehow unfair, as if the initial price was fair rather than merely a result of supply and demand. This made sense in a small tribal society where both the market and production were limited, those who stuck to the 'normal' price gained utility whenever they valued goods at a higher level than said price. It no longer makes sense when we have no direct relationship with the seller and it is a dangerous predisposition in the hands of those who would regulate market transactions.

David Friedman explains it better than me anyway:

http://www.daviddfriedman.com/Academic/econ_and_evol_psych/economics_and_evol_psych.html

Micha, That some gas

Micha,

That some gas station managers closed shop and decided not to sell gas at any price because they feared being labled "price-gougers" seems doubly strange. Stations who sell-out will suffer an image problem, but these other stations go one step worse - they lose money. How often does this actually occur?

The Latin phrase is “cui

The Latin phrase is “cui bono,” not “qui bono.”

It's actually "tali mi banana".

That some gas station

That some gas station managers closed shop and decided not to sell gas at any price because they feared being labled “price-gougers” seems doubly strange.

It's not a fear of labelling, it's a fear of being fined or worse. Recall above: The governor of Georgia, Sonny Perdue, quickly issued a statement condemning “price gouging” and promised to investigate and prosecute any incidents of this vicious crime. Notice the bit about "promised to investigate and prosecute." More than labels here.

Of course _short term_

Of course _short term_ shortages are possible... Entreprenuers are not omniscient beings with perfect, Nostradamus like knowledge of the future. Sometimes consumers give producers a surprise.

Successful entreprenuers are the one who can correctly guess what needs consumers will have tomorrow....and get there today. Sometimes they are right. Sometimes they are wrong. The fact that sometimes they are wrong doesn't mean that free markets don't work.

I think a liberty-minded

I think a liberty-minded econ grad student could make a good paper out of doing a thorough analysis of the retail gas market in Atlanta these past couple of months.

Like David Rossie, I'm skeptical that a gas station manager would shut down the pumps rather than sell inventory at a higher-than-usual but less-than-maximal price. However, the behavior of gas station managers is more complex than we might imagine, and varies significantly from station to station and from chain to chain. Enlightened self-interest leads different people in different directions - and not every gas station is run by particularly enlightened people.

A friend of mine is a store manager for a large gas station chain. I intend to thoroughly pick his brain about the subject next time we get together. I do know (from him) that immediately after Katrina, it was hard for retail stations to get resupplied, and that continued for some time (a week or two, perhaps?). But all is well these days; the tanker trucks are arriving fully loaded and on schedule.

Constant, Yes of course. My

Constant,

Yes of course. My question is about the behavior of the gas station managers.

I made the mistake of

I made the mistake of getting into a discussion of "price gouging" with some other students. All I managed to do was convince them I was a horrible person who believed that $6 a gallon gas was actually moral. But from listening to them, my take is that people think once the price goes above a certain level (and of course, they just instinctively "know" where this level is), the economic facts of the sitution and the consequences of certain actions as defined by economic law don't matter anymore. You've crossed into the realm of ethics, and it's simply unethical to raise the price of gasoline during a disaster. I was told by a participant in the conversation that it is an ethical question. I think they see it as sort of like if you knew you could relieve gas shortages by sacrificing a newborn infant to the gods. The consequences might be good, but that does not make the action right. They see raising the price of gas the same way. Mixed in with that is the fuzzy idea that if the price goes up, only people who have more money will get any gas, and a lot of people I know object to the very idea that goods and services are allocated based on how much money you have because that violates some (again, fuzzy) idea they have of justice and fairness. As far as I can figure, from a fairness standpoint shortages are preferable to people with more money getting more gas.

Ahhh. . . arguing semantics.

Ahhh. . . arguing semantics.

Of course short-term shortages are possible? You, Libertarian Jason, dare question me even though I so clearly can use words like "ceteris paribus"!?!?

Usually, that renders me unassailable due to sheer intimidation. :wink:

But okay, fine. If by "short-term shortages are possible," we all mean "businessmen can't predict how much they're gonna sell," then bravo. Exciting. Yes, sir - you've nailed it. I'm sure that they can't.

I guess that my only good point (if it even is a good point) was that, absent transactions costs, price gouging laws, and people's inate anger at seeing prices rise astronomically in a short breadth of time (actually also a transaction cost), gas stations would never "run out" of gas when those little signs with the magnetic integers still reading $3.49. Restaurants would not have long lines on Friday night. Coke's machines would adjust price according to outside temperature.

My point was much more in line with what cuthhyra was saying about evolutionary psychology. (The explanatory power of which often depresses me.) Consumers simply expect lines, shortages, and wait times to ration our consumption in some instances and would probably get disgruntled if store owners resorted to price to do the job in all cases.

You’ve crossed into the

You’ve crossed into the realm of ethics, and it’s simply unethical to raise the price of gasoline during a disaster.

Did you try the point that "it's not your gas, it belong to its owner, and how is it wrong for him to price it however he likes. It's not your gas. It's not your f--ing gas. Who the h-- are you to..." and so on. If it's wrong for gas stations to price it however they like, then it's wrong for people on ebay to sell to the highest bidder. Should we close ebay, since it is at root a bidding site and therefor by its very nature represents an attempt by each seller to sell for as high as he can get?

I think people are not empty of the right moral intuitions, they just need to be reminded of them. If something does not belong to you then it's none of your d-- business what the owner does with it.

Most people simply can't

Most people simply can't keep the idea of supply and demand in their heads, so they suspect dark conspiracy when prices jump. Then of course there is the industry which thrives by encouraging these conspiracy theories and promising to bring the conspirators to heel.

Weird is right. People

Weird is right.
People always complain about everything so you can tell what is going right by what they are complaining about. For example, if they complain about high gas prices it means there is plenty of good quality gas. If they complain about waiting an hour in line for gas there is a shortage but the gas is of good quality with little complaint about price. If they complain about global warming, dependency on OPEC oil etc. that means the gas is cheap and plentiful and of high quality.
Of course any negative change markedly exacerbates the complaints. Remember when they raised the federal gas taxes about 4 cents in 1993? I can still remember the howling. Then in 1999 as prices headed toward $2.00/gal Trent Lott promised to save the day by repealing the 4 cent tax. As Sen. Lott explained, "My legislation offers immediate and sorely needed relief for today's drivers who are suffering the financial consequences of this Administration's (Clinton’s) inaction on a national energy policy." Now prices have dropped from $3.00 to $1.99/gallon but no cheering and no energy policy.

Consumers simply expect

Consumers simply expect lines, shortages, and wait times to ration our consumption in some instances and would probably get disgruntled if store owners resorted to price to do the job in all cases.

Hm. A world of implications here.

I don't think consumers have a connection between "we don't want prices to rise astronomically even during a spike in demand" and "there's not enough for everyone so we have to get in line and wait our turn". At this point, I'm not convinced there's anyone in the world that sees a connection between the two unless they post to a libertarian and/or economics blog. Thus, if you ever presented the case to "the average consumer" as a choice between queues and high prices, they'd just look at you funny.

BUT - and this was your point, really - even if by some miracle they did see the connection (perhaps through a concerted educational outreach effort by religious leaders, professional atheletes, and pop musicians) I do in fact think that any number of people would consider queing to be the "fair" solution, much more fair than raising prices. Never mind that people don't want to deal with spot auctions at retail outlets - that's a separate question. I honestly believe that most people would be happier saying "Well, the people who got here first deserved to get the last package of twinkies... after all, they got here first."

There may be something particularly populist about such thinking. After all, only the rich can afford to pay high prices, but anybody can stand in line. And if you really want something bad enough, you'll get there early enough. Just like we used to do for concert tickets back in college, remember? Yeah, that was cool. And fair, too. Man, remember that scary looking guy two spots behind us for the Springsteen show? Turned out he was okay... even shared his weed with us.

Same gripe goes for "Lexus lanes". Why let the rich people skate through traffic? They can sit and wait like the rest of us. And don't give me any of that economics crap - that's just making excuses for the rich. Again.

Micha and Kling are exactly

Micha and Kling are exactly right, and the "reasoning" of Lisa's students is typical. We're Cs, but the world is full of Ms. I recall a debate on Slashdot about the evils of inequality, in which I asked some socialist if he would prefer world A where I had $20 and he had $10, or world B where I had $1000 and he had $100. His response was that he would prefer we both had $100, demonstrating a willingness to destroy wealth out of spite and envy so that he could feel better about his relative position.

Odd isn't it, people believe

Odd isn't it, people believe in God when there's no evidence for him and disbelieve in economic reasoning when there's heaps of evidence that it often works rather well.

Charge more than expected:

Charge more than expected: guilty of price gouging.
Charge less than expected: charged with predatory pricing.
Charge what is expected: charged with collusion.

In the absence of a better

In the absence of a better plan, equality is a decent strategy. For example if two people are collaborating on something, if they have no good idea of how to split the reward, splitting it down the middle is a decent rule of thumb.

With that in mind, the eglitarianism that is being noted in this discussion may be a product of an empty mind, of a lack of understanding. People may be applying the equal-shares rule of thumb which is so useful in other circumstances.

Often the same people who

Often the same people who yell "price gouging!" are the same ones who want evolution taught in the schools. Catallarchians (?) tend to understand that both supply/demand microeconomics and ecology are both aspects of spontaneously arising order.
Maybe somebody could come up with a curriculum that teaches both evolution and basic economic literacy as subsets of systems theory.
Before Katrina, Hawaii was regulating pas prices - anyone know how that's been working out?

I'm not sure if aardvark's

I'm not sure if aardvark's comment was intended to imply this, but I see very little correlation between religious sentiment and statist or egalitarian economic thought. On the contrary, Christians I know are by and large for the free market. And very few, if any, of them could be called "egalitarians" when it comes to wealth.

I shoulda checked this site

I shoulda checked this site earlier since there are some juicy assertions here for me to pick apart. Or maybe it's good I didn't or I'd never get any work done. Catallarchy, you are corrupting me, but not, alas, to libertarianism...

But I'll start with Tanner's point here:

I’m not sure if aardvark’s comment was intended to imply this, but I see very little correlation between religious sentiment and statist or egalitarian economic thought. On the contrary, Christians I know are by and large for the free market. And very few, if any, of them could be called “egalitarians” when it comes to wealth.

A lot of American Christianity seems to come from a particular school of thought that wealth is a sign of grace, and as people are differently endowed in terms of grace so it's perfectly appropriate that they be endowed with different levels of wealth. Grace is God-given and a sign of creation...

The reason why more scientifically-minded Americans tends to lean more to the left economically despite appreciating spontaneous order in evolution is due to a particularly rational calculation: the spontaneous order of nature is NASTY. Caterpillars eating terrified snails right out of their own shells, live. And any number of other terrifying ways to day. So it's a natural and rational impulse to try to avoid spontaneous order at all costs by imposing a moral order on economics. Only libertarians would think that spontaneous order would be a desirable situation for most humans.

In fact, you could even characterize socialism as part of this spontaneous order, if you so desired: an evolutionary response against the rigours of the natural order, which is deadly.

I'm being moderated again!

I'm being moderated again! Geez, man-on-squid sex is ESSENTIAL to this topic!

The reason why more

The reason why more scientifically-minded Americans tends to lean more to the left economically...

What makes you think that they do?

[quote]What makes you think

[quote]What makes you think that they do?[/quote]
If the (large number of) Americans who don't believe in some form of evolution tend to lean more to the right economically, and there is a maximum of 100% of the population, then the more scientifically-minded Americans (assuming we define that as including belief in evolution) lean proportionately more to the left economically...by the definitions of more and less.

I'd give more anecdotal and statistical evidence but I have to go now. Nevertheless, I think my point stands.

First, I don't think that

First, I don't think that believing in evolution is a good definition for being "scientifically-minded." I'm not sure whether there are many scientifically-minded people who don't believe in some form of evolution (e.g., a very religious physicist), but I'm quite certain that there are many people who do believe in some form of evolution despite being clueless about science in general.

I'm also not sure that those who don't believe in some form of evolution necessarily lean to the right economically. I've heard that a lot of the Republicans in the fly-over states are big government populists who vote Republican on social issues. And the Republicans aren't exactly the budget hawks that they were in the Coolidge administration.

It's the pols who call for

It's the pols who call for an end to price gouging who are the idiots. It serves them and only them and only in the short term. Consequences go unnoticed by these meat heads or they could care less...for a few votes.

Doesn't look good, does it.

Damn those price-gouging

Damn those price-gouging laborers who are getting $20-25 an hour in New Orleans. Before Katrina they were getting paid $10; now look at the situtation! Taking advantage of a disaster to raise their price. The nerve!

I demand an investigation into this heinous behavior!

Eddie, After all, only the

Eddie,

After all, only the rich can afford to pay high prices, but anybody can stand in line. And if you really want something bad enough, you’ll get there early enough. Just like we used to do for concert tickets back in college, remember?

The rich can also afford to pay people to stand in line for them. These people are called "scalpers." Two cheers for arbitrage!

Micha: Kinda hard to do that

Micha: Kinda hard to do that kind of arbitrage with gasoline, though. Although it probably happens somewhere... Makes me wonder if the people reportedly filling up 55-gallon drums with gas during the "shortage" were stocking up for themselves or hoping to make a profit in the secondary market once the pumps ran dry... I forsee a Marginal Revolution "Markets In Everything" post coming out of this. "Gasoline Scalpers." Heh.

Every heard of limo drivers?

Every heard of limo drivers? :grin: