Tuesday, January 31, 2006

More on Oil Prices for LJ

May I recommend a short article by Walter E. Williams a paragraph of which follows:

"After Hurricane Katrina struck, gasoline prices shot up almost a dollar nearly overnight. Some people have been quick to call this price-gouging, particularly since wholesalers and retailers were charging the higher price for gasoline already purchased and in their tanks prior to the hurricane. The fact of business is that what a seller paid for something doesn't necessarily determine its selling price. Put in a bit more sophisticated way: Historical costs have nothing to do with selling price. For example, suppose you maintained a 10-pound inventory of coffee in your cupboard. When I ran out, you'd occasionally sell me a pound for $2. Suppose there's a freeze in Brazil destroying much of the coffee crop, driving coffee prices to $5 a pound. Then I come around to purchase coffee. Are you going to charge me $2 a pound, what you paid for it, or $5, what it's going to cost you to restock your coffee inventory?"

It's not hard and it's a real condemnation of public education (including my UT Finance Degree) that every American high school grad is not armed with this. I learned more about economics in one week reading Thomas Sowell's Basic Economics (buy here, proceeds benefit SSJ, NOT) than I did in college.


Michael said...

LJ - For what it's worth, after reading some Williams and Sowell I came to realize that part of the reason I was a loony lefty was because I didn't understand the first thing about basic economics.

love johnson said...

how about this - just because i CAN sell something for $5, should i? How about because there is a disaster or some other horrible situation, i "only" sell it for $3?

And if i bought ice at $1 a bag....and then the demand and supply drive the price way up, and i started charging $5 a bag, i think i would get charged by law for price gouging?

so it's ok to price gouge gasoline, but not ice?

Michael said...

Scooter: CAUTION!! Softball headed your way!!

Scooter said...

First, as to the $5.00 item, you are free to sell it for $3.00 or less if you so desire.

When you sell your home that you bought for $200,000, are you going to sell if for that same price even though the market would bear $350,000? A lot more evacuees might be able to afford $200,000 but not $350,000. (House argument lifted from WW article cited above.) You are certainly free to sell as far below market as you’d like in an altruistic effort to aid the evacuees. Perhaps you should take it a step farther and take a hit on the sales price. It’s a much tougher call when it is a real choice and not a hypothetical. I’d applaud you as I applaud one of my clients who purchased two brand new homes here in Austin for Katrina evacuees to use for 2-3 years, a chance for two families to get back on their feet. (Interviewing families this afternoon.)

Second, Are you saying (“so it's ok to price gouge gasoline, but not ice?”) that if you charged $5.00 for the bag of ice you’d be charged by some D.A. with price gouging? If so, that is a problem with the law, not the market. Our AG made a lot of noises about such nonsense in 2005.

Sayeth Williams from article above, “[W]hich is preferable: [ice] available at [$5.00] or [ice] unavailable at [$1.00]? Rising prices get people to voluntarily economize on goods and services rendered scarcer by the disaster.” In other words, those fleeing Katrina encouraged to buy less ice thus saving more supply for others. You might be good enough to go to N.O. and offer services or sell your ice for no profit, but do we really want the government telling LJ, he has to go down to N.O. and offer them. Should I be required to go there and offer my paltry legal services?

From the Professor, “Recovering from Katrina means resources will have to be moved to the Gulf Coast. I ask you, how does one get electricians, plumbers and other artisans to give up their comfortable homes and livelihoods in Virginia and Pennsylvania and travel to Mobile and New Orleans to help in the recovery? If you said pay them higher prices, go to the head of the class. Higher prices, along with windfall profits, are economic signals of unmet human wants. As such, they encourage producers to meet those human wants.”

Ok, you grant that you don’t want Bushitler telling you that you must go to N.O. and offer services, rather, you’ll agree that you’ll subject yourself to higher taxes so that the government can take care of it (all evidence to the contrary notwithstanding). That one I’ll address later.