Monday, September 15, 2008

In defense of price gouging

As expected, the gasoline prices in Atlanta spiked the evening before hurricane Ike hit the Texas coast. And equally expected was the hysterical reaction of our elected officials and unelected bureaucrats who kept accusing gas station owners of price gouging. Whether they were right or not is beyond the point; I'm simply in favor of price spikes in times of panic.

Gas station owners are in a very precarious pricing situation. They are in an extremely competitive industry, with pricing pressures changing within hours. However, it is in their best interest to keep their prices slightly above demand, in order to always have gas available. According to various sources, gas station stores record much higher profit margins than gas itself, and thus attracting people with available, yet cheap gas, is essential. Striking this balance can be difficult during regular times; during a panic it's hit and miss.

This was also the case in Atlanta during the last panic. The local Quicktrip had regular gas for $3.66 in the morning, $3.93 in the afternoon and was sold out in the evening. A nearby Chevron station had gas available, for $4.26. Thus the fair price for the local market was somewhere between $3.93 and $4.26, with the first creating excess demand and the latter surplus. Those who favor price controls during panics should now pay close attention: as a driver, I couldn't care less about the price of gasoline when my tank is empty, only about its availability. Even those who view gas stations as more than just as business, as providers of essential infrastructure goods, should realize that because of the higher price, the Chevron station has provided an important public service: it kept gas available for people who really needed it. Quicktrip failed in this function: its manager did not estimate the level of demand properly, causing the station to run out of gas and stop servicing its constituency for nearly four days.

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