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10/30/2005

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bernie

I'm sorry. The government is the real winner via taxes.

Anonymous

"For example, it was suggested that charging the market-clearing price in a shortage is inefficient because it is not the "equilibrium" price. I think what the commenter meant is that if the shortage is temporary, the price that clears the market will soon fall. But the point is that it is the market-clearing price."

I am not sure if this was a response to my comment or to someone else's. But if it was to mine, perhaps my original post was not clear. When "price gouging" occurs, the price paid by consumers on the market IS higher than the equilibrium price. The seller holds back supply and deliberately increases the price, betting that buyers will believe (wrongly) that the emergency has caused the market price to increase. If the emergency has caused a breakdown in competition, or if the competing sellers raise prices in concert, then they can "gouge" the market and extract an undeserved premium. This situation is similar to Posner's "salvage" example, and it is the reason for price gouging regulations. Opportunistic behavior by sellers in an emergency can and does occur.

If there is a true shortage, that is not a price gouging situation. That is simply a reduction in supply. In a shortage, there is less justification to disturb the market, unless the scarce good is very important and very expensive, and it would be unjust to leave pricing to the market for the duration of the emergency. For instance, if the price of heating oil spikes because of a short-lived emergency, it might be unconscionable to force poor people to choose between food and heat. However, it might be preferable, economically, to give a subsidy, perhaps heating "vouchers," to poor people rather than impose a control on the market.

Anonymous

On the clarification of the admiralty salvage case, a clarification of my own:

I think that the situation is well described (at least statically) as a bilateral monopoly, as is the Starbuck's case, with the provisio that incentive effects are negligible because it is usually only by luck that the rescuer is near-by enough to effect the rescue (this may have been more true when admiralty law developed than it is today, when there may be some use to incentivizing people to become rescuers during storms etc.)

But the main point is that conceptualizing the situation as a bilateral monopoly does not get you admiralty law. In the typical one-on-one Nash bargaining box, a 50-50 split is typically conceived as the "fair" solution and the split typically arrived at when the game is played iteratively. (In single round games, of course, any outcome within the box could be achieved). When you consider that the value being "split" in the salvage case is the value of the cargo PLUS the value of the crew's lives, it is clear that a 50-50 split is not what is meant in admiralty law by "fair price."

That is the main motivation to viewing the situation as a transaction costs problem, i.e., the high costs of ex ante bargaining which creates bilateral monopolies as you point out. By conceptualizing admiralty law as what would result from a hypothetical negotiation behind a veil of ignorance, it is easier to see how you get to admiralty law's solution.

One might question whether such a negotiation would yield admiralty law when the incentive to rescue is so much lower than the value of the crew and cargo. Wouldn't you want to give everyone else a big incentive to rescue you (which of course cuts against the "fair" price idea). That seems plausible if incentive effects are a realistic possibility, but note that admiralty law requires ships in a position to rescue, to rescue. Admiralty law then can be conceived as a hypothetical insurance contract priced ex ante, which like any other contract you are obligated to perform (or pay the price for breaching).

Corey

If I had been advocating a wholesale resort to central planning, then perhaps Posner's invocation of the classic "communism fell so the free market is right" line could be taken seriously.

"I think the experience of queuing would change the minds of most intellectuals who think that resources should be allocated by nonprice methods."

I think the experience of queuing would cause both poor and rich citizens to recognize their common vulnerability to supply inefficiencies and feel a larger sense of solidarity with each other as they interact while waiting in line.

As I indicated, the free-market solution has the side-effect of placing the consumption-reduction burden on the poorest, outside the sight and thought of the rich who can still pay the higher price.

Oh, and by the way, you don't have to have a car to be hurt by a gas shortage. Groceries went up too, everyone eats.

CH

"I think the experience of queuing would cause both poor and rich citizens to recognize their common vulnerability to supply inefficiencies and feel a larger sense of solidarity with each other as they interact while waiting in line."......

Yes, lets punish everybody so there is no incentive for people to save money for a rainy day, or work harder and more efficiently so that lifes curveballs don't cause so much damage. Then we can all blow our money on booze and hot women because we'll all be in the same crappy boat no matter what we do. But hey, we will have a wonderful sense of togetherness.

Joe Merchant


CH,

I traveled in East Germany during the summer of '90 - less than a year after the wall fell.

The place was a poster of "lack of incentive," with unfinished and unambitious projects littering the mostly undeveloped countryside.

The people had a totally warped (from Western perspective) picture of the necessities of life, rent and food were virtually free, anything else was astronomically expensive.

And, yes, when they did get some money (as they did while I was there with the east marks = west marks declaration), booze and hot women were on the top of the list alongside western cars and travel (to seek more booze and hot women, mostly.)

frank

Well, I guess that's what communism does to you.

Bill

I haven't researched this, but probably a lot of the oil companies (both refiners and distributors) use a FIFO inventory cost flow assumption. In periods of rapidly rising prices that results in revenues being "matched" with acquisition costs that are lower than replacement costs would be. This leads to increased profits which are totally artifacts of the accounting principles used. When prices fall then profits are reduced because revenues are being matched with acquisition costs that are higher than replacement costs. This is true even though the company may have exactly the same mark-up on sales both when profits are inflated and when they are deflated. Before anyone can start discussing "price gouging" he needs to adjust for the amount of "windfall profits" that are due solely to this artifact of accounting. If "gouging" means anything, it has to be related to mark-up, not profit.

afuturehead

corey wrote:

"As I indicated, the free-market solution has the side-effect of placing the consumption-reduction burden on the poorest, outside the sight and thought of the rich who can still pay the higher price."

if you stop to think about who is "rich," it's not necessarily the sterotypical, moustachioed, bourgeois, gold-bug so despised by socialists. in the wake of katrina, the "rich" were those who possessed 1) the foresight to have removed themselves from the area, 2) boats, or 3) guns.

true, one might not have had the material resources beforehand to buy emergency supplies or a plane ticket on a whim. but any industrious person -- such as the out-of-stater who showed up with supplies -- could have gone down to his local bank, taken out a loan, and told them "i'll be back after the 'cane with double your money."

that people relied on politicians to save them only goes to show the error in thinking that government will deliver.

a currency-based price system trumps all other methods of organizing knowledge, labor, and capital by rewarding those who have best planned for future consumption and can best provide for present consumption. markets create informational (and thus investment) incentive structures unmatched by any political system of communal decisionmaking.

as for queuing, the idea that people will line up, hold hands, and gain empathy from their common plight is naive, to say the least. at some point, the rewards of violence exceed its costs. peaceful queues in communist russia were enforced by an oppressive regime and the omnipresent threat of violence.

the question then becomes, whom shall we reward? -- the people who saved and invested so as to provide in times of crisis, or those who are willing to take by force?

Spaulding

ìWhen "price gouging" occurs, the price paid by consumers on the market IS higher than the equilibrium price.î

Actually, this point (as Posner correctly pointed out) is patently false. The writer misunderstands what equilibrium entails, ie: the intersection of supply and demand curves. The refiners did not, as the writer suggested, conspire to restrict supply in a time of emergency, the high price rather reflects the effects of a shock to supply. The market is clearing at that price. Moreover, the price is not contrived by sellers acting in concert or conspiring to raise it, issues which are resolved through antitrust policy (again by market intervention). There is no evidence that this emergency has caused such a ìbreak down in competitionî ñ one would presume that the temporary profits created from such a shortage would induce (far better than price controls) increased output, and more hearty competition to boot.

In reality, the writerís logic bespeaks a simple underlying fallacy, often made but scarce recognized, that there is some sort of ìnormalî or ìjustî equilibrium. The fallacy underlies the price-gouging laws, and many other unwarranted interventions in the market that have spanned the ages. The writer would not shirk from intervening to halt what he considers to be unjust profits ñ ìundeserved premiumsî I believe he said ñ through enacting price controls, in this case, the price-gouging laws. Posnerís frustration hinges upon this idea: that the use of these laws is an attempt to forcibly clear the market which ignores the consequences and incentives created. He rightfully points out that markets yield more successful results than bureaucratic regulations; such regulations quite often do more harm than good.

The fact is, more vigorous enforcement of dormant price-gouging laws may be rhetorically appealing, but it will surely exacerbate rather than resolve, the problem.

Anonymous

"I think the experience of queuing would cause both poor and rich citizens to recognize their common vulnerability to supply inefficiencies and feel a larger sense of solidarity with each other as they interact while waiting in line."

And senslessly burn oil together. I'm on the far left here, and to advocate such senseless waste of fossil fuels for a sense of solidarity to me seems rather dangerous to our species long term survival.

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