I don't think there is such a thing as "price gouging." I think the market will eventually correct itself. And plus why would a company risk bad publicity which would far outweigh the benefit from raising prices beyond what the market calls for?

Posner and Becker don't seem to agree on WHO made extra profits during the gasoline shortage.

Whatever the case, I agree that price controls are rarely a good idea. They just create "black markets."

However, given the ignorance of the public, the frequent ethnic differences between the price-raisers and the customers, and our penchant to regulate everything and for certain people (lawyers like me included) to profit from more regulation, I am not optimistic that we can prevent price controls, or avoid silly demagogues of all parties screaming about "gouging" whenever prices go up.

I suspect that class-conscious corporate sellers may recognize the risks involved, and refrain from raising prices as high as they could, in order to avoid the political consequences of doing so. If this creates what amounts to a lottery, so be it.

In any shortage where the market is restricted, the Moscow rules of shopping from the old Soviet Union apply--if you see if for sale, buy it now, whether you need it or not. You'll never know when it will be available again. You'll fill a half-full gas tank if you pass a station with a short line, thus increasing the shortage.

Although the oil companies profits may have been a fair and just windfall, a structured return of that windfall profit to the economy in the form of a period artificially lower fuel costs would return that windfall to the economy in a fair and just manner - benefiting those who the high prices injured, whether that injury was fair and just or not.

If the cost of energy is allowed to remain at these significantly higher levels for long (a 50% increase in one year cannot be considered insignificant), general inflation and/or recession is likely - which would ultimately hurt the oil companies more than a simple return of their windfall to the economy.

Whether or not government intervention is warranted or necessary to prompt this action is a political question. I wouldn't call it simple pandering to the electorate for our legislators to mandate a return of the windfall.

Joe

Returning profits via low artificially low prices post-shortage is a nice idea but would not work. Here's why.

If consumers know prices two weeks from now were going to be, say, 50% lower as post-shortage profit-returning prices arrive, consumers will delay fuel replenishment until then. This is costly. It rewards that group of consumers who have the flexibility to put off consumption. This is probably not the same group who bore the brunt of the high prices.

Once the low prices arrive, consumers/gas stations/refiners will horde fuel in the knowledge that prices in x weeks or months will definitely be higher and they can make a profit by selling then. What happens? Either a) you have to queue to get low price gas, or go without completely, or b) prices that would have occurred x months from now are brought forward to today. Either way, somebody makes a killing, almost certainly not the people who bore the brunt of the high prices in the first place.

The intuition behind this is that prices below the market clearing rate are usually a bad idea with or without a shortage.

So while your idea is intuitively appealing I think it fails on fairness and certainly efficiency.

As a quick thought, while I certainly agree price controls are a bad idea in the long run, in the short run in these types of cases you're stuck between a rock and a very hard place. While price ceilings cause shortages, without them, prices can rise to a point where people who need gasoline (in this case) can't afford it. Low-income families and persons may not have been able to afford the gasoline without a price control (or not without a high relative cost to them), though a shortage certainlyh isn't good either.

Assuming that scarcity in gasoline was really "caused" by Hurricaine Katrina, this analysis would make sense.

But I don't think the market for gasoline after Hurricaine Katrina was a well-functioning market. At least right before and after Katrina, prices were not reflecting good information about the scarcity of supply. They were reflecting consumers' fear that the supply would run out. Given the fact that in the midst of such a disaster the owners of the gasoline are in a better position to accurately assess how long they can stretch their supply out to meet consumers' demand, it makes sense to hold them liable if their assessments turn out afterward to be wildly off.

Opportunism is always going to be tough to identify. But I don't think the sweeping generalization that the effects of Hurricaine Katrina were "natural" is by itself enough to let the sellers in that market off the hook.

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If you want to see how fortunate we are to live under a price rationing system, consider the performance of non-price rationing in the Soviet Union:

As of 1989, the average citizen spent 40-68 hours a month standing in line. In April 1991, "only 12 percent of respondents in a national survey claimed to have seen meat in state stores" and only 8 percent had seen butter.

From Shleifer and Treisman (2003), "A Normal Country", NBER Working Paper, available from http://papers.nber.org/papers/w10057

A glimpse of the effectivness and power of the price mechanism.

I think that before any nutty politicians try to benefit politically from the imposition of price controls, we all need to think back to the 1970's, when the laughable Jimmy Carter instituted price controls. Let's all remember the disastrous results. There is no reason to think it will be any different this time around. I know this, and I wasn't even alive in the 1970's. I agree almost 100% with what Judge Posner is saying, and I hope the general public aren't goaded into price controls by some smarmy politician seeking votes.

Price controls aren't a reaction to an economic problem, they're a reaction to a psychological one--when some disaster or hardship strikes, people want to have someone to blame. Other than going outside and shaking your fist at the sky, there's not much point in blaming God or nature for hurricanes, but you can certainly blame gas stations or oil companies for raising prices. Acting on this by imposing price controls, or a "windfall profits tax," or whatever will almost certainly make everyone worse off in the long run. But not reacting to lots of angry voters may cost you an election. There's no shortage of historical examples of people getting mad and doing manifestly stupid things that hurt them later.

Posner,

Let me say first, there is no such thing as "basic economics!" There are no "laws" of economics, except those that people create. And the one created and enforced in the US, often by force, has been for quite some time that, "he who has the gold makes the rules."

And your comments certainly demonstrate a disdain for, if not total hostility, to democracy and democratic instituions. I do not disagree with the benefits of less driving and less consumption of gasoline you list. In this list you are on target. My disagreement is with how we achieve these goals and upon whose backs they are achieved. First, the goals should be pursued democratically. That is the decisions about how gasoline is allocated should be made in a democratic manner. In a representative democracy, as the US is, these decisions should be made by our representatives. Not by a market mechanism that never existed as protrayed to begin with. Second, the decisions about how the burdens of implementing these changes are distributed should also be made in the same manner. Democracy trumps economics, of any form, but certainly capitalist economics and its general hostility to democracy.

Having said all this, however, I worry about our democracy and democracy in the world when people such as yourself and I suspect many of the representatives I mention above believe that markets and competitive marginalism provide positive benefits for the US and the world. I've searched through economics textbooks for years with no luck finding any evidence this is so. This massive fraud of captitalism, economic laws, and the essential need for markets has made the US the most unequal society in the world, and now that same fraud is being forced on the rest of the world. There is no bright future for the US or the world in this fraud, only a future of lost democracy and even greater disparity in wealth and political power. This is the greatest danger facing the world, especially because its largely invisible to persons such as yourself and Dr. Becker.

I agree that price gouging is not an issue here, economic principle also tells us that unless there is some collusion on the part of sellers/makers of gasoline, the efforts to gain market share will force price competition, bringing prices in line with what users are willing to pay. In addition, is it not common sense to think that higher profits by either business in the chain will entice further entrants into the market? This is how the system works, the market will correct itself - leave it alone.

Recently no one has known what the "right" price for gasoline is. We try to find it by various means--economists focus on the movement of prices and consumers' reactions in searching for the lowest price. The "market will correct itself" as a prior poster said. But the "market" is not real, it's the abstract result of millions of individual decisions. Just dismissing stories in the media and the speeches of politicians as "steam" is, in my opinion, an example of tunnel vision. Certainly the stories and speeches may be unenlightened, at least by the lights of economists. But they may serve a function nonetheless in modifying some of the individual decisions that make up the market.

Isn't it possible that the "steam" is also information to the retailers? If gas goes up 5 or 10 cents in normal times and no one notices, then the price increase sticks. If people talk about it and the media find it a story, then maybe the increase doesn't stick, because retailers think another raise is inviting trouble. Consumers may also be more likely to change their behavior and reduce demand when the media is focussing on the issue. In other words, treat the price setting as a game of chicken between politicians and retailers (remember when JFK jawboned down the Big Steel price increases in the early 60's?).

Saw some mention of the idea that retailers make more profit as prices fall because they go up fast but fall slowly. The article I read said that consumers stop searching for the lowest prices when prices are on the way down. But it's also true that the media and politicans have lost interest.

So, one way you could lean on me to lower my prices is to have politicians and journalists say bad things about me. Another is to change your behavior in ways that let you avoid my high prices--either by buying gas from someone else, or by arranging to buy less of it. I'm pretty sure this second way is more likely to change my behavior, because it costs me money. I'm very sure it's more likely to cause me to change my behavior in sensible ways--if politicians are threatening to nationalize my business if I don't lower prices, this can surely get me to lower my prices, whether this is sustainable or not.

All this blowhardism from various levels of politician will have a very small effect on gas prices and use of gasoline, long term. On the other hand, continued higher prices and the increasing viability of hybrid cars and telecommuting is going to decrease the use of gasoline, especially if prices stay this high.

You argue that the rescue case is distinguished because "the rescue ship is not being asked to ration a limited supply by raising price; there is no one else competing for the rescue service." I'm not sure this is strictly correct. Presumably the possiblity of extracting high prices for rescue may induce more ships to search for such opportunities during storms etc.

Maybe the rescue situation is best conceived simply as a case where there is no reasonably well-functioning market for emergency rescue services. Ex ante negotiation with all potential rescuers simply is not practical. (I don't think the issue is as Becker puts it, that there simply is not enough time to negotiate. Although rescuers stand to make 0 if no bargain is reached -- and thus are better of with a deal than without -- the crew in need of help stands to lose their lives. Even if there were a lot of time to negotiate, but no other rescue options, the rescuer presumably could extract a very high price).

The "salvage" doctrine solution of admiralty law then is an effort to approximate the deal that might be struck if ex ante negotiation were possible. (An additional constraint might be helpful: that the participants to the negotiation did not know if they were to be the rescuer or the rescued, i.e., a sort of veil of ignorance.)

The gasoline market, by contrast, is pretty well functioning and doesn't need this.

N.B. By ex ante negotiation above, I mean negotiation where the participants don't know if the rescue services will be needed or not, or when, or who may be in a position to provide them. Presumably if a sailore could negotiate with all other sailors beforehand under these contraints, they would reach something approximating admiralty law. (Ignorance of whether you were to be the rescuer or rescued also can be a constraint, though it wouldn't have to be if there were sufficient potential rescuers ex ante).

Simply negotiating ex ante on the ex post facts yields only "sufficient time to negotiate," which for the reasons I give above, I don't think is enough.

And those who need the gasoline the most, not being able to express their need by outbidding other consumers for the limited supply, will suffer the most from the shortages.

Posner is trying to slip one by here. Perhaps those who "need" it most will be able to express theri need by standing in line longer, or getting there earlier. Not that lines are desirable, but this casual equation of need with ability to pay is, in the world outside economics books, dubious.

If a "return of windfall" were executed over a one year period, it would hardly be possible to hoard cheap gasoline, or heating oil, or LNG, or any of the other affected commodities.

I doubt the oil industry is magnanamous or long-sighted enough to do that, though. We'll just have to start increasing cost of goods and salaries to compensate for the radically increased cost of fuel (and housing) that we've just gone through.

If a "return of windfall" were executed over a one year period, it would hardly be possible to hoard cheap gasoline, or heating oil, or LNG, or any of the other affected commodities.

There are other ways to horde gas - like delaying international purchases of it while prices are supressed. US stocks of fuel were depleted by Katrina so these might be given priority over retail distribution.

However severe the cap, putting a price ceiling on gas makes clearing the market (potentially very) unprofitable, and doing so would be a breach of fiduciary duty. You can't expect oil distributors to arbitrarily cease being profit seekers en masse out of magnanimity. This is little more than a utopian ideal that has been demonstrated time and again to be unhelpful. Incentives matter.

I agree with all of Mr. Posner's post except for the "security" argument, where it's assumed that if the United States consumes less oil, it will be less vulnerable to the whims of oil-producing nations. I used to assume the same thing, but I've been swayed the other way recently, especially by the following two articles by economist Arnold Kling:

http://www.techcentralstation.com/012003A.html
http://www.techcentralstation.com/020405A.html

In a nutshell: trying to influence Saudi Arabia's wealth and influence by reducing American oil consumption is incredibly indirect and costly and inefficient. The economic, environmental and political problems are separate and should be treated as such. In Kling's words:

"If cutting off funding is critical to winning the war on terror, then we must press the Saudis on that point. We should tell them that we respect their rights as a sovereign nation, but they owe it to the community of nations to not fund terrorists. If that approach does not work, then it is a waste of time to wring our hands over our 'dependence on foreign oil.'"

I agree with the thrust of your comment; I think it's also interesting to contemplate how such price controls affect preparation for future disasters. During one of the hurricanes this season I heard a radio news report about a related case:

A retailer in Florida, if I recall correctly, had stocked up on emergency supplies, including generators and fuel, which they stored in a special location for hurricane aftermath goods. The idea was that this small but vital cache of goods that don't ordinarily sell well could be rented out at an unusually high price to customers in need during an emergency.

The rental price they determined (I think it was set in advance) was high by the standards of prices that prevail at ordinary times, but still some low number multiple of ordinary prices -- I seem to recall it might have been four or five times the rental rate at ordinary times. This was based on the retailer's experience with previous emergencies, and naturally also their costs.

Predictably, once a big storm actually hit and the retailer started renting generators, some people called for laws to preclude such prices. But if such prices were precluded, this would wipe out the incentive for the retailer to purchase, maintain and set aside storage room for such supplies. The likely outcome would be to drive the retailer out of the business of hurricane preparedness.

My conclusion is that high prices at times of disaster probably can help fund the creation of emergency supplies, which act as a form of insurance. The emergency prices remind me of paying the deductible portion of an insurance policy.

I generally do not support price controls. But Posner is guilty of some bad economics here, as well as some bad policy. Two examples:

(1) Posner writes, "If 'price gouging' laws or even merely public opinion deters refiners and dealers from charging the high prices necessary to equilibrate demand and (reduced) supply, there will be shortages."

The fallacy here is that, when price gouging occurs, the price is not a true measure of supply and demand. Rather, sellers exploit a natural disaster, for instance, by charging higher than the equilibrium price. If regulation succeeds, it will restore the equilibrium price, and there will be no shortages.

Of course, regulation is imperfect, and the price controls imposed after a disaster might not reflect what the true market price would be. But short-term regulation following a disaster is arguably preferable to permitting the gouging of consumers for basic needs, like food, gas, or heating oil. Notably, for "luxury" goods, there is never a need for price gouging laws, because consumers can simply do without them.

(2) Posner writes, "a reduction in the amount of oil consumed in the United States would make the nation more secure by reducing the wealth and economic leverage of the vulnerable, unstable, or hostile nations, such as Saudi Arabia, Iran, and Venezuela, that control so much of the world's oil supply."

This is a fair point, but it is not an argument for price gouging. Rather, it is an argument for government-imposed conservation measures and perhaps a national oil or gas tax. A gas tax would encourage conservation and help fund the measures necessary to combat the security threats facing this country. This is a win-win proposition in many ways, though the increased prices would hurt consumers in the short term, while society adapts to the higher prices.

In place of your "human growth hormone" example, I would use the example of organ replacements. There's a limited supply, which is allocated to maximize benefit-to-human-life rather than by wealth. As "Grumpy Old Man" comments, this leads to the possibility of black markets ...

I would also distinguish between three types of "gouging". The first is the creation of new supplies with high-prices as a motivation: Becker's rapid refinery repair example, or an bottled water salesman rapidly sending trucks into a disaster zone. The second is the "coincidental scarcity" of a preexisting resource: imagine there was a single functioning grocery store, with a limited stock, at the Louisiana Superdome after the flood. You cannot justify its raising prices arbitrarily; everyone (except the would-be profiteer) would be better off allocating the food according to need. The minor optimizations you could achieve from, say, auctioning off the stock, would pale in comparison to a triage or organ-transplant model. The third is the (apocryphal?) story of a Starbucks (?) charging $10/bottle for water for WTC first responders: there was no scarcity, no allocation, and no resource creation involved---like the admiralty law example, it's just defecting in one-round games against people who are in no position to seek alternatives.

"under the admiralty doctrine of "salvage," the second ship would be entitled to a "fair" price for rescuing the first, but to no more."

---

I think this is an excellent point about Admirality law. From my understanding, in Admirality there is an absolute duty to assist. This is different from a store. You don't go to a gas station and claim you have a right to assistance. This is why people contract for contigent situations. Personally, I belong to the automotive club. I read the magazine occassionally and use it as basic tow insurance.

Gasoline is a not an emergency commodity except in war time. Nixon tried price controls and they led to long lines.

I believe the best approach is very simple. Offer people a tax subsidy on fuel efficient vehicles. I think the Bush admnistration went the other way on this and offered people a deep tax subsidy on SUV's.

At one point, we have to recognize price has something to do with supply and demand not wishful thinking. Gasoline is pretty much a commodity. I had a girlfriend whose father believed that Chevron simply made the best gasoline. I like Chevron because the stations are clean. But Exxon and Chevron is no different when it comes to hydrocarbons.

When ever I see a Chevron, I still think of him. He was very nice and always offered to pay for breakfast. This is a good example of a subsidy. If you are nice to my daughter, I will buy you breakfast.

The government should develop a program called older father welfare. In this program, fathers are offered welfare to distribute to young men who would marry their daughters. The money could be used to encourage family time with propsective husbands.

The private program of fathers subsidizing their daughters for rent is not working so well. Many fathers buy into the idea that their daughters have to live better than them in big cities like New York, Chicago, or San Francisco. The worst market is Boston.

Pretty soon, you have a daughter that is unmarriable because the prospective male gets priced out of the market. Now if the government intervened and offered a cross subsidy to young men, this would change the market dynamics and promote family values.

Of course, people need a straw man. They want to blame the big oil companies. But come on, are the big oil companies to blame because your daughter or your son did not get married? Let's put this in perspective.

Economists and judges need more grandchildren. Any tax policy that promotes this legitimate and important goal, I am for. Let's be creative!

In California we might have a special lane for a hybrid vehicle. In Ohio, we might have a special lane for taking your grandkids to breakfast on Sunday.

In my opinion, I favor the grandchildren approach.

"I believe the best approach is very simple. Offer people a tax subsidy on fuel efficient vehicles."

Although lesspolitically feasible, you could achieve better results by imposing an equivalent tax on gasoline, because you don't really care how people use less gasoline, you just want them to use less gasoline. You wouldn't want to give tax subsidies for hybrid vehicles becuase that makes inventing a solar or hydrogen or some other kind of gas-reducing car less attactive.

Great topic.

I live in Florida where storms batter us from time to time.

Last year our local police made a big deal about arresting a man for, "price gouging." It seems that a resident of Nashville, Tenn., read in the paper about how many residents were without power. He went to his Home Depot, bought a ton of generators, loaded a truck and drove to Palm Bay and held an auction. He was arrested and his goods detained. Florida's Attorney General, a member of the Republican branch of the oligarch party, Charlie Crist, made a big deal about stopping gouging. "I fully support a business' right to make a profit, but we cannot accept unjust profiteering, especially when it puts an extra burden on citizens who have just endured a significant hurricane," said Crist.

Had Charlie been truthful he'd say, "We only pretend to believe in a free market. If we allowed market forces to set the price, needed goods would flow into the areas that need them. I know price gouging laws hurt the victims of storms by keeping them from getting the goods they need, but, hey it makes me look good to the unthinking majority who votes."

For Grumpy Old Man’s comment, both Posner and Becker are right on who made the extra profits from gouging; it is a matter of time frame. The gas stations made extra profits while selling the gas in their tanks, but were squeezed when they bought new fuel to refill them; the unaffected providers than made higher-than-average profits when they sold fuel to the gas stations. Of course the insurance firms, affected fuel providers, and consumers lost.

Ken Z @11:38,

First, relax, it's a blog.

Of course there are laws of economics. Take, for example Gresham's law, "bad money drives out good." You can take all your alleged, "democracy and democratic institutions," and pass all the legislation you can dream up, but when you introduce dimes with no silver, the silver dimes will vanish as quickly in our lifetime as they did in Sir Thomas Gresham's day.

The laws of economics are as fixed and immutable as the laws of physics, which as we all know are entirely relative. Convene all the legislatures you want, a scarcity of supply increases price. Pass all the democratic bills you want and capital will still confiscate the excess value of a man's labor.

David

The fallacy here is that, when price gouging occurs, the price is not a true measure of supply and demand.

I think this would be true when a disaster causes a failure of the market and competition itself. But neither you nor Posner allege Katrina caused such a failure. Your contention seems to be that in a functioning market a sharp reduction in supply will create conditions so that it is in suppliers' interests to raise prices above equilibrium.

This cannot be right, because it means suppliers are forgoing profit. Starting from above equilibrium price, suppliers could increase profits by lowering prices and selling more. Because the price starts from above equilibrium, the additional volumes must more than compensate for the lower price. In fact that is what defines an equilibrium: it pays suppliers not to deviate from it.

Provided the market is functioning (and by that I mean at a minimum that suppliers know the state of their reserves and distribution capacity, and consumers have some prices information), price must be a measure of supply and demand because if it is not then opportunities for profit are not being exploited. True, temporary deviations from this will occur by mistake. But I think Posner's point holds in a functioning market.

Lets talk about the distributive effects then. Judge Posner, would you support or oppose a 100% tax on all profits gained from a temporary, natural-disaster related, shortage, to be distributed among the victims of that disaster? (In this context, this means a 100% tax on the profits received above and beyond the pre-disaster profits expected from an equal quantity of sales.)

After all, you can't argue that the extra profits are needed to provide an incentive to continue selling e.g. the gasoline. After all, gas dealers stay in business during non-disaster periods, and there's no evidence of which I'm aware suggesting that the opportunity for disaster profits has encouraged some dealers to enter the market.

I have a second, wholly separate question. What if there isn't really a meaningful drop in supply? For example, during the period immediately following Katrina, were there ever actually (except directly along the major evacuation routes) actual gasoline shortages, as shown by people willing and able to buy gasoline who could not buy them? Oil was released from the strategic reserve, as I recall. Was there ever an actual need for the rationing effect of price increases? Or were gasoline sellers merely reacting to an inaccurate perception of such shortages by the public?

(You may reply that the higher prices reduced demand, thus preventing shortages. This is where empirical data would be helpful. If anyone has such data, please provide it.)

I confess I haven't read all the comments, so I don't know if others have pointed this out, but the judge's distinction between "natural" and "artificial" scarcities is not ultimately convincing. The oil producers knew that hurricanes are perfectly foreseeable in the Gulf and that their production facilities would be badly affected by such storms. Now they are trying to shift the costs of their failure to manage their own risks back onto consumers by raising prices. So it is not mere supply and demand which determine the price in the events of risk-management malpractice in light of foreseeable natural disasters; instead, it is the usual type of duress that the judge otherwise condemns: it is extortionate to put consumers under duress by habituating them to artificially low prioces (propped up by their failure to mitigate their potential risks by strengthening or geograhically dispersing their productive capacity) and then backcharging them for the producers' own risk-management malpractice.

Lots of free-market purists here....

A truly free market leads nearly inevitably to monopoly, negating its good aspects. So, we regulate to discourage monopolies.

A truly free market comoditizes labor, hiring and firing at the whim of a new business plan - not good for skilled labor development, so a balance is struck with some thin layer of job security for skilled employees - not much fun to live in, but I'll wager most of us are living in this condition today - or toiling for severely substandard wages in "secure" positions.

A truly free market allows infinite price volatility - your Big Mac might cost $7 at noon, and only $0.70 at 3pm. This has been tried, it's offensive and drives customers away. People prefer some predictability in their costs.

Problem is, when an entire industry that is linked into the base of the economic food chain (like energy) jerks around their pricing too much, justifiably or not, it puts chaotic inflationary ripples through the entire economy. Many lucky businesses of all types will get rich off of the chaos - unlucky ones, even when well managed, can be put out of business in the turmoil.

Question is, what kind of world do you want to live in? I don't like hourly price swings for restaurant food - I can vote with my feet there. I also don't like massive profits posted to energy companies in the name of crisis control - unfortunately, my only voting influence there is at the ballot box.

Joe

Where to begin? That free markets lead to monopoly is an old claim and it is wrong. As Bork (1978) said: "The congealing [i.e. increasing concentration] of the economy has been prophesied freely since at least the debates on the Sherman Act in 1980, always on the basis of overwhelming current trends, and it never comes to pass." It still hasn't. It won't. In unhindered markets you get monopoly in precisely the areas where monopoly brings efficiencies. Online trading is provided by a monopolist in most countries because it pays to have all buyers and sellers in one place. But atomistic competition appears where there are no efficiencies in scale e.g. web site development. Both are essentially unregulated markets.

Where it is easy to fire employees it is easy to hire them. Europe has persistently higher unemployment than the US in part because it is harder to sack workers there. Job security need not be undermined by less security in any one job: the unemployed don't generally stay out of work long in high employment economies.

You contradict yourself by saying that "[a] truly free market allows infinite price volatility" but then saying that it is competition which actually prevents such volatility when "I can vote with my feet". Your second point is right: competition disciplines firms not to do things that annoys their customers. So where your idea of free market price super-volatility comes from is a mystery.

when an entire industry that is linked into the base of the economic food chain (like energy) jerks around their pricing too much...it puts chaotic inflationary ripples through the entire economy

The recent spike in energy prices is notable because it has not as yet caused a slowdown in the global economy. So where's the cheese, Joe? Where are these chaotic ripples?

Important point: There are many price control laws out there and they are not enforced. We have a more or less free market only because people wants it, not becasue of constitutional or legal guarantees.

Actually, for the most part the Constitution protects Amercicans from government, grants us individual liberty and a rights to private property. It is through free markets in which these liberties can be granted and guaranteed. So, implicitly the Constitution does set up a free market system. It is only when government intervenes that this system is inefficient at allocating scarce resources with alternative uses, such as price controls.

What's frustrating about this thread is that most commentators are missing the main point: if the judge will tolerate price "gouging" in "natural" disaster situations but not in man-made ones (in which he, in harmony with admiralty and other law, condemns the practice because of "duress"), and if that distinction is faulty (because ex post facto fluid recovery of the consequences of your own risk-management failures is extracted from consumers, exactly because they are under duress due to circumstances), then the judge is really up to something else when he supports the practices of the oil companies.

What could that be? It is the usual game the U-Chicago Law and Economics crowd plays. They postulate premises which may or may not exist in fact (i.e., the "enlightened self-interested Economic Man;" the existence of "efficient markets" in which lots of participants have perfect information - - an especially laughable premise; etc.), and then pronounce that laws should do one thing: encourage the movement of resources to their "highest and best use," defined as that which the highest bidder defines by her eagerness to bid. And voila! Well-being is maximized for all! Never mind that the premises are dubious in the extreme or the consequences turn out in fact to be drastically bad for many in the short and long terms.

A legitimate objective of democracy is to provide a basis for managing the "life risks" of the less fortunate; that some "inefficiencies" occur is no more intolerable than the massing of great amounts of capital in the hands of insurers to pool against risk, shifting to them the right to make decisions on how resources should be allocated.

The judge has a bias for the status quo, for his brand of laissez-faire, "pragmatic" capitalism. With the utmost respect, this fact is nothing that the critical legal studies movement didn't predict and recognize a long time ago.

Oh how predictable, Posner is against price controls and accuses anyone who disagrees of being ignorant of economics.

I was well educated in basic economics, fortunately I was also educated in basic democratic, moral, and political theory. That wider outlook allows me to conclude the following, even conceding that Posner's economics are correct.

Lets be Tort lawyers instead of Contract lawyers for a second...

The concern of price-gouging laws is not price but rather distribution of costs. When a natural disaster occurs, there are material costs that are covered by insurance. There are also supply reduction costs... massive, uninsured, with no one to fault. That cost is going to fall on someone. How it falls is a function of legal and market architecture.

Ability to raise price functions like insurance against these costs. Producers/suppliers affected by the disaster can pass on costs to consumers. Indeed, they can apparently even show an increased profit.

For the consumer, ability to consume less is a way to avoid the costs, unless the good or service is a necessity. Gas is a necessity.
Consumers cannot reduce their consumption below that needed to get to school or work via car or public transport. They need to drive to the store if they are to eat cake. Thus, consumers absorb supply costs.

You might say, great, the cost was distributed widely, and that is the best possible result of a bad situation. But the cost was distributed regressively. The entities with the largest surplus of funds (gas companies) paid 0% of the supply reduction costs. Teachers and factory workers and engineers and salespeople and especially truckers were already struggling to get by, but they felt a real added pressure from the price increase.

That isn't fair, for the same reason a flat tax isn't fair. People don't like it. A majority of the population in this democracy that we live in doesn't like it. Hence, politicians that seek re-election (as opposed to academics and judges with tenure) also don't like it, even if they were once economists.

Many people in this country have the funny idea that corporations are chartered by the state in order to provide services to the people. People get annoyed when corporations escape damage from disasters while they do not. Perhaps Posner also views this as a failure of education.

I find it particularily ironic that after a long post trying to establish that price controls = protectionism = bad, Posner then seeks to protect American markets from influence by foreign powers that control large oil interests. How is it that Posner can see how concentrated foreign oil interests harm American interests, but does not recognize the same harms when consolidated corporations like ExxonMobil exercise their market power.

Price controls restrict the free market. Inelastic demand restricts the free market.
Price controls allocate supply reduction costs progressively. Inelastic demand allocates supply reduction costs regressively.

Natural disasters inject a massive cost into the market, absent regulation, where it lands depends on the distribution of market power. Not acting amounts to a positive preference for assigning the harm to the poor in proportion to their need for the commodity.

Gas is a necessity.

For some, yes. And that's why the higher prices in a crisis are essential -- it's the most effective rationing system, by discouraging people from doing unnecessary driving and leaving more fuel for those who absolutely need it. The market prevents an egregious loss of time for those who need gas (who would be stuck in shortage-induced long lines at the gas station), at the expense of higher prices. Those who wish to still trade off time for gas money can still do so by car-pooling, walking, taking public transportation, or any other method that is too inconvenient compared to driving under normal circumstances. A majority of the people in this democracy that we live in may not like it, but they would like the alternative much, much less.

Corey correctly recognizes that the fundamental question here is whether price or non-price rationing under reduced supply is preferred. How to allocate a scarce and essential resource? I also think he is probably right that price rationing is less progressive than non-price rationing, if the willingness to queue for supplies under non-price rationing is negatively correlated with income.

I disagree on other points he and others have made. Although high prices will undoubtedly put gasoline temporarily beyond the means of some, I doubt this is many people. This will be the subset of people who can afford a car and pay for gas at $3.00 per gallon but not at $6.00 per gallon. I do not think non-price rationing for the whole population can be justified even in part for the sake of these few unfortunates. Targeted assistance is instead much more sensible.

The costs of non-price rationing have been somewhat overlooked. For some people the inability to get access to gas short of queuing for hours will be exceedingly costly. Non-price rationing thus also fails in some measure on fairness grounds, as well as efficiency.

A couple of other responses. 1) Energy-reliant corporations most certainly have been hit by energy prices, most notably airlines. 2) Gas is a necessity, but there are ways to reduce consumption by making better use of every gallon and high prices encourage that.

Energy reliant corporations can also to some extent pass on costs. Airline tickets went up, cost of groceries went up. It isn't just gas consumption that consumers are being asked to reduce.

We could argue for weeks about whether or not the average consumer can "afford" to reduce their consumption enough to compensate for the recent Consumer Price Index jump. You can dig up anecdotes about poor people driving SUVs, I can find several million people forced to commute over 100 miles each day because jobs and affordable housing are not co-located.

Poor people don't drive around burning gas for fun. They know more than anyone posting here about conserving and budgeting and living within their means. This gas price jump hit the lower and lower-middle classes hard. It hit rural areas harder than cities, and sprawled cities like LA or Indianapolis harder than places like NY or Chicago.

If you can come up with a targeted subsidy for that situation then great. The problem is that disasters arise quickly and prices rise faster than targeted bailouts can be designed. The price gouging laws operate to fix costs where they first fall until the state or private insurers can respond with relief. Distributed costs are harder to relieve or insure against.

And reducing supply in this situation is (by the same logic) also not an acceptable option. If Shell loses a pipeline, and is restrained from passing on the shortage by raising prices, why should it be allowed to reduce output and cause queues, provided the capacity can be covered from another source. Sure the cost will be higher for Shell, but it was Shell's supply-chain asset that was damaged, and Shell is both the most able to pay and the most efficient insurer or bailout target.

There will certainly be situations where there are no options for providing the commodity from another source. But the gas delivery system in the US is highly redundant. The gas price jumped nationwide in response to a localized event. The supply reduction in one area could have been mitigated through the reserves via other delivery methods (at least much more than was done).

Of course economists will scream that I am a socialist for characterizing the oil/gas industry as a public utility, but I would refer them to the large number of countries worldwide that seem to see it my way.

Corey, I'd take it one step further than you: the oil companies, fully aware of the perfect foreseeability of storms like the ones that have happened, failed to manage their risks. Now they should be permitted to, as you pointed out, regressively tax their customers to mitigate their own risk-management malpractice? Meanwhile, Exxon NETS $10B in profits (reported today by the WSJ)? By Posner's own logic, this is bad economics and bad law. It encourages the movement of resources to the lowest and worst use - - that of bad managers who have been proven beyond any doubt to be bad at what they say they will do.

That's why I made the point that Posner really doesn't believe it himself. He couldn't. He, instead, prefers the comfortable shoes of orthodox status-quo-preserving law-and-economics half-hearted resource-allocation rhetoric.

for those interested check out www.cafehayek.com (and drudge) to see the ails of price controls.
a short aside: for those who think it's bad when companies generate profits, companies distribute the profits to invest into the company and hire more workers which will inevitably include the people who were the hardest squeezed (or they will pay them to their shareholders.)

Sands:
Maybe. That is if you assume that they are competent managers, which they have already proved themselves not to be (they ran huge risks without protecting themselves with adequate risk management practices and now want to tax consumers to make up for it). It is just as likely that they will do something equally stupid with these "profits" (more accurately, exactions) as it is that they will behave competently.

Sands obviously has a lot of knowledge about what corporate executives should do with their profits in theory. Unfortunately it has absolutely nothing in common with what modern American corporations actually do.

Ben writes:

"Provided the market is functioning (and by that I mean at a minimum that suppliers know the state of their reserves and distribution capacity, and consumers have some prices information), price must be a measure of supply and demand."

I agree, of course. "Price gouging" by definition arises from a market failure: perhaps suppliers see a natural disaster, like Katrina, as an opportunity to hold back supply and artificially raise prices.

I do not know whether the recent increase in gas prices is due to real reductions in supply, price-gouging behavior, or a combination of both. Sustained "price gouging" would require, most likely, some sort of collusive behavior among competing suppliers. The announcement today of Exxon's 3rd quarter profits raises the fear that something is rotten in the industry, but it is only speculation at this point. I suspect we will find out more in the coming weeks and months.

If the recent spike in oil prices is a true reflection of the market, then so be it. I would not advocate massive intervention in the oil market just because gas is $3/gallon. That's still the same price in real terms that Americans were paying 30 years ago.

One caveat: in a really serious crisis, with a really serious shortage, price controls and rationing might be necessary to make sure that all people, and not just the wealthiest, have access to gasoline and heating oil. There are emergencies in which other factors outweigh the "efficiency" of the market.

David

It seems to me a price gouging test could be developed. Conceptually it would go like this:

1. Did emergency x cause a reduction in or elimination of competition in market y? i.e. was there market failure

2. If so, did the prices and/or quality of products supplied in that market during its failure reflect supply and demand conditions as if competition had continued unhindered through the emergency. If not, gouging is defined.

This is like a use of dominance test in competition law, and I think it's workable. Some markets will be easier than others to estimate a competitive benchmark - gasoline would have to be among the easier given the market data available and its homogeneity.

To help make this workable, we might define a few short circuits: if a supplier runs out of stock during the emergency then if anything he has underpriced and gouging cannot be defined. If there is evidence of consumers shopping around that will help rule out market failure. Benchmark against comparable markets where competition is working.

One other possibility is that there was no market failure but there was collusion. Competition law already captures this.

It's certainly preferable to the current situation where any price increase in an emergency could put you in court.

Joe

You claimed high energy prices cause "chaotic inflationary ripples". The latest Blue Chip consensus has US real GDP growing at 3.1%-3.3% per annum for each of next 6 years. Inflation is a steady 2.4%-2.5% for that period. Chaos?

"Where's the cheese? - $26 billion in increased revenue for Exxon in 3 months"

So what? a) That's not money down a black hole. b) The high prices that produced that surplus are not functionless and come with the triple benefits of stimulating oil exploration and production, encouraging efficient use, and encouraging development of substitute technologies (like hybrids). c) it has nothing to do with inflationary ripples, or chaos, or cheese.

It seems that there are a lot of comments justifying price gouging in this situation by saying that the market isn?t functioning correctly or that competition is restricted. I?m not sure this is really a significant issue since the barriers to entry are not nearly as dramatic as they are in the Alaska Packers and salvage cases.
The problem is that there isn?t enough gas. People are great at finding creative ways to make money, and if outrageous profits are allowed to a few, people will find a way to solve the problem as quickly as possible.

"If there are those who abuse the free enterprise system to advantage themselves and their businesses at the expense of all Americans," he said, "they ought to be exposed, and they ought to be ashamed."

That's a quote from Bill Frist in a New York Times article about people complaining about oil company profits. That is such garbage. If there is price-fixing afoot, then by all means investigate it and prosecute to the full extent of the law. Otherwise, using the enterprise system to advantage themselves is what companies are required to do, lest they open themselves up to shareholder lawsuits. Competition will take care of the rest. Gas stations are the most visible example of competing companies undercutting each others' prices to attract new customers. Frist is implying that either there is a price-fixing going on, or that consumers are no longer shopping around to get the lowest price, or that he doesn't believe in letting the market set prices. He should just say which one it is, rather than vaguely attack Big Oil. And will he call for subsidies to Big Oil when oil bottoms out again and Exxon is temporarily losing money? Don't think so.

In the same article:
"The industry says a windfall profit tax would limit investments," said Philip K. Verleger, a consultant and a former senior adviser on energy policy at the Treasury Department. "That's wrong."

"You can come up with a tax that would not impact investments but might in fact stimulate them," Mr. Verleger added. "You allow the industry to recoup its investments and make a good return. Then you look at incremental revenue and tax that."

Many people seem to think the government should make industrial policy for the oil companies. That it's a snap to impose just the right kind of taxes that will make Big Oil less profitable and more productive at the same time. Keep dreaming. Oil companies invest their money in increased production because they predict they will profit from it. Is it the government's job to decide what a "good return" for a company is? Remove some of the reward for future production, and oil companies will find better uses for their money than investing in themselves.

Hold on... hold on... those profit figures are very revealing, because they seem to add substantial evidence for Corey's point about low elasticity of demand. The percentage increases in the profit of the major oil companies from last year, as summarized by one Arizona article (linked from my own blog), are as follows:

Exxon: up 72%
Shell: up 68%
Conoco: up 90%
Chevron: up 53%

this is an average increase of 70.75%. Did gas prices over the same period increase by a significantly higher amount? If not, and assuming there was no factor other than gas prices that significantly contributed to higher profits, it would seem like there is a direct relationship between profits and prices in the industry. The curves are parallel. This means that price didn't affect demand at all!

Thus either gas was priced below equilibrium before Katrina (very generous of the oil companies if true, but I rather doubt it), or there is next-to-no elasticity of demand for gas (because largely of our lousy public transportation in this country) and higher prices do not in fact ration use at all.

(Anecdotally, this is very slightly supported by the fact that there were gas lines in Houston, as reported by a friend on scene, before Rita notwithstanding presumed price increases.)

What I don't understand is why price gouging during crucial times is necessarily a bad thing, or rather, that it's not 'normal economic action.' After all, the owners of the gas stations were risking their lives to provide people with gasoline. If there were strict price controls then few people would be able to find gasoline and for survival's sake, the gas stations would probably have been ransacked.

All too often, unfortunately contracts are signed under duress. A handsome salesman for example, visiting a lonely woman, can be said to have enacted an exchange while she was less able to make projections on why really she would need a set of dictionaries. Such things are not reported of course, but force and fraud leads many to do things that are not for their 'best interest.'

Also, I'm really interested in learning about your stance on the Great Depression. For some, like Joseph Kennedy, it was a boon, for most, it was a bust.(climbing on the bones of many) Is it even ethical to buy and sell stocks at all? Are some stocks too terrible even if they will bring one a profit?

Paul Gowder:

Your figures nicely prove what we should all intuitively know. Parallelism of the curves is to be expected, because (a) there is no real substitute for gas, and (b) it is scarce (i.e., not universally abundant, like salt or O2). Hence there is no need for "collusion" among the oil companies. They know an opportunity when they see it and behave in perfect parallelism.

Paul Gowder:

Your figures nicely prove what we should all intuitively know. Parallelism of the curves is to be expected, because (a) there is no real substitute for gas, and (b) it is scarce (i.e., not universally abundant, like salt or O2). Hence there is no need for "collusion" among the oil companies. They know an opportunity when they see it and behave in perfect parallelism.

This part had me confused:

The curtailment reduces output, which results in an increase in price as consumers bid against each other for the reduced output. In addition, the reduction in output is likely to reduce the sellers' unit costs; the reason is that sellers normally sell in a region in which their costs are increasing--if they were decreasing, the sellers would have an incentive to expand output further. With both price rising and cost falling, profits are likely to zoom upward.

Why do the sellers' unit costs go down? I would think that when supply decreases, the sellers' average costs will increase as it tries to increase supply through less efficient methods. Posner wrote that sellers usualy sell in a region in which their costs are increasing, but what happens after a natural disaster that changes this?

Ben,

The chaos is down at the ground level - where people actually live and work. Sure, overall US GDP is up and growing steadily - and a windfall for big oil is likely to benefit the US more than most other countries, except the major oil producers.

If all the economists care about is the view from 8 miles high, yeah, this is all roses, $26 billion didn't go down a black hole, it just got relocated - from the pockets of many into the pockets of few. If that redistribution of wealth pattern doesn't bother you, you should visit a country like Panama - see how the top 1% of wealthy there live, then check the lifestyle of the bottom 90% - it's not the model for a vibrant world economy.

"I would not advocate massive intervention in the oil market just because gas is $3/gallon. That's still the same price in real terms that Americans were paying 30 years ago."

What, you mean during the mid-70s energy crisis? The other problem is that the wage and wealth of the average American has dropped significantly over that same time. (A fact often obscured by citing GDP growth numbers that include the massive growth in wealth among the already rich since 1975)

"Is it the government's job to decide what a "good return" for a company is?"

YES. Recall the originalist rationale for chartering corporations in the first place. It was viewed as a quid pro quo privatization of services the government did not want to micro-manage. However, there is a public trust element, often reconceptualized in this day and age into a "shareholder trust" element.

"So what? a) That's not money down a black hole."

No, you are right, it will be great for the beachfront real estate industry and create several new toilet-cleaning jobs at the new summer cottage of the Exxon CEO. But it represents an extremely massive redistribution. $26 Billion dollars that was in the hands of American consumers, now under new management by the Board and CEO of Exxon. Maybe if we write them a nice letter they will spend it on developing new eco-friendly fuels that will destroy their business model instead of voting for dividends, stock buybacks, and profit sharing plans that net them each $100 million dollars in spending cash. Lets all watch the news and see what happens eh?

This whole thing is a textbook example of why the initial distribution of market power directly determines the end distribution of market benefits. The ironic thing about the price-gouging laws is that where they did get applied, it was against individual gas-station owners (that is, small-business owners who may or may not have been gouged themselves by their suppliers).

Exxon made Billions, and gets a insurance/gov't bailout of all the actual damage to its infrastructure.

The American populace paid Billions, regressively, and only managed to provoke a few statements from congress and some prosecutions of localized small-business scapegoats.

But as Posner points out and I agree, to a free-market economist, this result was efficient.

You folks who want to reduce oil consumption by raising prices on consumers... why are you unwilling to accomplish the same end with a top-down government limit on output? A price control is somehow evil because it disincents production and causes queues? But price-gouging is OK because it reduces consumption without causing queues? The result is the same! I say that you just don't want to have to look at the queues. Lines of working class people at the pumps would be unpleasant and remind us daily of real disparities in wealth. The other problem with queues is that even the well-off have to sit in them. But under Posner's way, the poor stay home, out of sight, and the middle class can still afford to come out and pay extra for gas. One could even say the price increase is worth it, because it keeps those unsightly poor from crowding the lines at the station and the supermarket.

Behold the sanitation tax.

The other point is, even if the Exxon managers spend their new $26B in a socially responsible way, what is your rationale for preferencing that over the socially responsible spending of the 300M American consumers who would otherwise have done so if they hadn't had to spend $26B extra on gas to get to work?

Ah, see, maybe you don't think the people will behave collectively in a socially responsible fashion? The Board of Exxon is more controllable, rational, and efficient at managing money?

So why not give ALL money to the Board of Exxon. If they are truly capable of acting in the best interest of the common good, we should empower them to do so no?

Oh, but that looks like fascism! I agree. So, the question becomes, at what point does profit maximization and wealth concentration cross the line and convert a system that was primarily democratic into one that is primarily fascist?

The question isn't, does Joe Sixpack get a job? Rather, did Joe Sixpack have enough resources to choose his job independently, or was he subject to re-assignment into an unwanted locale by the Board of Exxon.

Ah, see, maybe you don't think the people will behave collectively in a socially responsible fashion? The people collectively re-elected George W. Bush on one of the largest turnouts in recent memories; yet I have a feeling that this outcome was not entirely satisfactory to you. On what basis do you believe the same people are more likely to behave in a 'socially responsible' way - whatever that means - than the alternatives given the choice ? Would you actually trust them with that choice ? Or would you rather foist it upon them for their own good ?

Lines of working class people at the pumps would be unpleasant and remind us daily of real disparities in wealth.I am sure the 'working class people' across the nation would love nothing more than spend hours waiting in line for the education of Mr Posner and the public revelation of those embarrassing disparities of wealth; I am also sure that while these lines would be 'unpleasant' to Mr Posner, they would in fact be quite comfortable for, and appreciated by, those in them who are working class. If anything, they would certainly be quite an improvement over our present arrangements.

As for those problematic disparities, they would clearly be best dealt with by making us all equally broke so we have nothing else to do but wait in line for whatever little is available and affordable. I mean, we'd all be in line all day long but equal. That's got to count for something at the end of the day, right ?

I guess I should not joke around too much. Given how intimate with the desires and aspirations of the 'working class' you seem to be, one can only conclude you must be one of them.

Can I give you a hug ? Or do I have to get in line for that too ?

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