When the hoarding equilibrium sets in

by on November 3, 2012 at 4:37 pm in Current Affairs, Economics, Law | Permalink

There were no laws against price gouging. But the petrol stations knew that every single customer would hate them if they were the only station to let prices rise such that supply and demand came back into equilibrium. And so because the stations didn’t gouge, we were in a terrible equilibrium where everyone’s rational response to the below-clearing price was to hoard, because there was real risk that the stations would run out of fuel. And there was real risk of running out of fuel because of the hoarding. Breaking the hoarding equilibrium would have required a coordinated price hike that both allocated fuel to its highest valued uses and told everyone that there would be fuel available for them in an emergency if they really really needed it. That latter part is crucial – it kills the incentive to hoard.

That is from Eric Crampton.  Eric makes a further point.  Even in the absence of laws against price gouging, individual stations may be reluctant to raise prices and incur the wrath of customers.  Yet if all stations would raise prices, and markets would clear, consumers would know they could get emergency gasoline if they had to.  That would help break the hoarding equilibrium, if done collectively.  The real market failure may be the unwillingness to raise prices.

Addendum: Here is what we are getting: “He also said the Defense Department was sending in 12 million gallons of fuel to be pumped from five mobile stations. “They’ll have a 10-gallon limit,” the governor said. “The good news is, it’s going to be free.”

david November 3, 2012 at 5:31 pm

Rationing and then tacitly tolerating private trade of the rationed fuel achieves the efficient allocation without the apparent concentration of benefit.

GiT November 3, 2012 at 5:52 pm

One need not even be tacit. There’s no reason not to be explicit.

david November 3, 2012 at 6:07 pm

No, it needs to be tacit – otherwise the incentive toward corruption amongst the distributors of rationed goods would be enormous.

GiT November 3, 2012 at 6:14 pm

Not really.

david November 3, 2012 at 6:43 pm

Laundering some of the supply to a explicitly-approved store is too easy.

GiT November 3, 2012 at 6:45 pm

So is selling things on a blackmarket.

jj jones November 3, 2012 at 5:32 pm

Oh good. Free gas. That ought to solve the shortage problem.

Doug November 3, 2012 at 5:39 pm

Most stations have multiple islands. Why not segment the market? At one, charge pre-storm prices, where customers wait in a long line of cars; at another, charge a premium for less wait.

Gordon Mohr November 3, 2012 at 5:53 pm

Love this idea. ‘Paris Metro Fuel Pricing’?

The social acceptability might be improved if the ‘premium’ price(s) didn’t float but rather were a fixed multiple set by law/local-convention. That is, a 2X island, a 4X island, an 8X island, etc.

Then it will be seen as formulaic — and could indeed even be required as an emergency allocation measure by authorities — rather seen as just ‘as high as possible’. (‘As high as the market bears’ may be economically optimal but per the above often isn’t socially practical.) Convention over confrontation.

Dismalist November 3, 2012 at 7:47 pm

There’s an even easier way: Slow pumps with low prices and fast pumps with high prices. The pumps don’t even have to be different. Signage will do the trick [temporarily, of course].

Bernard Guerrero November 3, 2012 at 8:58 pm

+1

NedKom November 3, 2012 at 10:07 pm

I notice this site has many commenters who have no doubt that their novel and superior ideas could change the world for better. Yglesias types :-)
As for this particular idea, if there were such a station I would get few unemployed folks to buy the cheapest fuel and sell it more expensively on the black market. I wonder whether the gas station can do that cheaper than few well organized occasional laborers.

Andrew' November 4, 2012 at 3:18 am

He’s not proposing to solve the economic problem, we think that is a known solution.

He’s talking about taking the edge off.

Oh, and where do you go to find the people who’s ideas really will change the world for the better? Would Cuomberg letting 1/3 pumps act economically not make it a little better?

Andrew' November 4, 2012 at 3:28 am

Are we supposed to get all our world improving ideas from Bloomberg, who took time out to lobby that hurricanes on full moons and high tide make action on global warming imperative. That clown?

Ryan Miller November 4, 2012 at 8:15 am

This is implicitly happening: at least one station on US9 in Ocean County NJ has been only ordering premium fuel. There’s no line.

maguro November 4, 2012 at 8:46 am

Wow, what is premium, like 30 cents a gallon more expensive than regular unleaded? Hard to believe that such a small price increase would make much of a difference in a hoarding situation.

Yancey Ward November 4, 2012 at 1:45 pm

And get sued immediately for discriminating against poor people.

Plamus November 4, 2012 at 1:52 pm

“Poor” is not a protected class (yet). But against minorities, for sure.

andy November 3, 2012 at 5:39 pm

Do all stations need to raise prices? If the answer is yes, doesn’t it indicate there is no problem in the first place?

BC November 4, 2012 at 6:42 pm

I question the idea that, in the absence of anti-price-gouging laws, prices won’t rise on their own. If that were the case, why do we have all these laws outlawing price gouging? Also, there have been prosecutions for price gouging in the past, i.e., even *with* anti-price-gouging laws, prices do rise in some cases.

In the Christchurch case cited in the original post, the prices didn’t change immediately despite the absence of laws against price gouging. Apparently, gas supplies were restored in a few days. It could just be that price discovery takes some time, more than a few days, not necessarily that gas station owners feared their customers’ wrath. I imagine that gas station owners look at their competitors’ prices in trying to gauge the market price. That doesn’t mean that prices never change, either in normal times or in response to a supply shock. It just means that, especially when there is a major shock, price discovery can take some time. Had the shock lasted longer, eventually some customers might have grown tired of waiting in long lines for gas. They would be willing to buy gas at a higher price from a station with shorter lines. Those customers would not resent that station’s “price gouging”; they would appreciate it.

Lack of instantaneous price discovery does not mean that a government-mandated floor nor ceiling would be better. It could just be a reflection of risk and uncertainty in understanding where the new equilibrium price would eventually be.

Gordon Mohr November 3, 2012 at 5:41 pm

So rather than banning gouging the welfare-maximizing and recovery-accelerating policy would be to mandate it.

This might be an appropriate role for a distant federal government, unconnected to local social relationships: undertake unpopular but necessary steps. “Well, my neighbors, I’m sorry my station’s prices are so high, it’s part of the emergency order from those damn FEMA bureaucrats. The prices will be back to normal soon.” Too bad the political incentives are exactly backwards, as the free DoD gas plan indicates.

NedKom November 3, 2012 at 10:10 pm

No, the appropriate policy is that the government doesn’t do anything and get the hell out of business of trying to be smarter than business people.
That alone would lower the cost of fuel (as tax part of price would be lower too).

Mike November 3, 2012 at 5:55 pm

Would the public tolerate masked price discrimination via bundling of services? Have any gas stations tried to limit gas only to members who sign up for a prepaid engine maintenance service and oil change program?

Mark Thorson November 4, 2012 at 11:20 am

I’d say public tolerance is driven by the perception that gas is in a special category like water or milk. Gouging on other things especially those seen as luxuries is just fine. Nobody will riot over $500/night hotel rooms.

http://www.nypost.com/p/news/local/gougers_make_room_at_night_h3nToan2cbfMfOiagWIr1O

John B. Chilton November 3, 2012 at 6:09 pm

Hoarding gas. And you see folks in the city with gas containers.

In unrelated news, Bloomberg said today “When you’re without power, please, please, don’t use candles to light your home near windows, near curtains…” There have been 6 fires attributed to candles.

Dale November 3, 2012 at 6:13 pm

Is it possible that efficiency might not be the most important concern at this time? Perhaps people reject willingness to pay as the correct criterion for allocating gas during this shortage? Are economists so brain-dead or cloistered that they cannot see any values other than efficiency?

Scott November 3, 2012 at 6:17 pm

What’s better than efficiency? You offer no solution.

Willingness to pay allows equilibrium, ignoring it causes a shortage as is pretty apparent.

What’s your other value? You make terrible assertions with no alternatives.

Thom November 3, 2012 at 7:58 pm

I think he would propose that everybody should get all the gas they need at below market prices. That is the fair and human thing to do after all.

Cliff November 4, 2012 at 12:39 pm

I will go further and propose that everybody gets everything they want at below market prices. It’s only fair.

Cliff November 4, 2012 at 12:40 pm

And all producers should get to sell all the goods they can make at above-market prices. Only fair.

Rahul November 4, 2012 at 1:55 am

Ok, so who do we blame this lack of efficiency on? For once, the Government seems out of this. The free market voluntarily sometimes selects an inefficient option?

Brian Donohue November 4, 2012 at 6:24 pm

No need to blame anyone, is there? If producers are concerned about raising prices for fear of retribution from consumers later, oh well. Consumer sovereignty =/= short-term efficiency.

derek November 3, 2012 at 6:38 pm

So getting the same amount of gas as your neighbor is now a human right?

Dale November 3, 2012 at 8:16 pm

I am astonished that you have so little imagination. Perhaps some people would value everyone getting the same, but too little quantity of gas. Of course, we could argue the relative merits of that outcome vs. the efficient outcome, and that argument might be different when faced with a short term crisis rather than a long term description for the economy. But I guess nobody believes in consumer sovereignty when it comes to policy, only for purchases. My guess is that most people in the current crisis would rather see everyone get too little but equal gas allocations than letting the rich buy the little gas that is available.

I won’t wait for your responses. My guess is that you believes that fools that think this way have no right to influence policy. They simply don’t realize that the short term price gouging profits will lead to wonderful long term increases in gasoline supplies that will prevent a shortage the next time a superstorm hits.

So go ahead and mock the idea that the government might actually give away gas to the stricken. You might as well mock anything that people do for any purpose other than economic efficiency. What’s next – the Endangered Species Act, legalizing slavery, abolishing public education? Yes, all of these can and should be debated, but simply stating that things could be more efficient is a thoroughly unconvincing message to me.

MikeJ November 3, 2012 at 9:43 pm

I’m more sympathetic to gas distributions to those who need it most – i.e. those who MUST drive to work that week. They will be willing to pay higher prices, others who can more easily find ways without driving for a period will and won’t buy as much gas.

Imagine two scenarios,
1) everyone gets 10 gallons for cheap/free – includes single dad pizza driver who MUST have gas to make money to buy food for kids, and me, a grad student living a short distance to campus and grocery stores, bars, whatever… I’m happy to take the gas because it makes my life a little easier (plus I’m a night owl with no kids so I can get in line in the middle of the night), the single dad can’t get enough and harder times ensue where he’s unable to care for the kids.

2) raise prices. I don’t bother buying gas because I can do without for a while and take public transport/bike/carpool, whatever while that single dad can buy it, yes it costs more but he is in great need and while he might not make as big a profit, he can at least bring home something.

Is it imperfect? Absolutely. But it’s also the best we have in the real world and is sure as heck better than a system where there’s no relationship between consumer’s value of gas and quantity they get… tell me again how (1) really serves a true notion of fairness?

anon November 4, 2012 at 11:45 am

So go ahead and mock the idea that the government might actually give away gas to the stricken.

Unfortunately, just because it is being given away doesn’t mean it is “free”. Who do you think is paying for that “given away” fuel?

Cuomo and Christie are both demagogues and economically illiterate. Bloomberg is merely a statist.

See “Our ‘leaders’ missed the Econ 101 Prereq” and “Scarcity is the Problem. Price Rationing is One Answer

Claudia November 3, 2012 at 8:46 pm

I suspect there were more than a few economists who helped craft the 10-gallon free gas policy…much to the horror of some economists here. I think it is probably the best of the bad alternatives in a very unfortunate situation. Crampton is wrong about a coordinated price increase, say one that pushed gas up to $15 a gallon and cleared the market, being desirable. That would have been met with so much protest. It’s one thing to set a surcharge on taxi fares in the storm when drivers risked their personal safety and property to serve clients. Exactly why should owners of gas stations reap a windfall from a natural disaster? Markets do occasionally fail and social insurance like disaster relief has a role to play. Fine to promote market based solutions too but let’s not lose sight of what has happened. New York didn’t fall into a bad equilibrium because of government policy…just drives home the point how important our public infrastructure.

Dale November 3, 2012 at 9:21 pm

Thank you Claudia, for showing that at least some economists who can still think.

Claudia November 3, 2012 at 9:28 pm

for better or worse we are all thinking … the balancing act between equity and efficiency is a tough one.

Rahul November 4, 2012 at 1:52 am

Did you mean equity or equality. Forget the balancing act; equity by itself is very hard to define. Is equality equity?

Claudia November 4, 2012 at 6:34 am

Call it equity, equality, or fairness. Just because something is hard to define (or model) doesn’t mean it is unimportant.

Rahul November 4, 2012 at 8:02 am

So, what is “fair”: Everyone having to wait equally long for gas? Or doctors, linemen, firefighters etc. getting priority? Is the latter result only the efficient outcome or both the efficient and equitable one?

I am not saying equity is unimportant; merely that equality by itself might be a poor surrogate for equity in many cases.

derek November 3, 2012 at 11:09 pm

And I believe in magic unicorns.

A sure fire way to create an instantaneous shortage of fuel is for everyone to fill their tanks at the same time. A quick way to create a crisis where there is none. An equally dramatic increase in the price will accomplish two things; increase supply and cause hesitation in the knee jerk reaction that caused the problem in the first place.

As I said in another thread, in the interests of equity all the emergency workers, linemen and other repair and maintenance personnel who are working as many hours as they can stand right now should not get double time or even get paid for overtime at all. How dare they, these greedy people, take advantage of a situation like this for personal profit.

There is an ironclad rule that has been proven again and again. Prices tell us what something is worth, and when that pricing mechanism is controlled by well meaning fools it inevitably ends up in shortages. Maybe just maybe the fact that there are shortages at all is an indication of a pricing mechanism that is not communicating how much the commodity is worth.

GiT November 4, 2012 at 2:29 am

There are shortages of everything all the time. The question is who suffers from the shortage. A month of rationing isn’t going to destroy the price system.

Andrew' November 4, 2012 at 3:38 am

Quite right, but that’s not what we are talking about. If you had to get home to take care of the kids, but before that you had to wait in the gas line, then the ice line, then the food line, then the water line (not necessarily in that order), you might be more willing to trade money for time.

GiT November 4, 2012 at 5:13 am

And if you had some gas and had the option of either using it for your needs or selling it for more money, you might be a lot more empowered than if your access to gasoline was a function of how grasping the rich felt this week.

Cliff November 4, 2012 at 12:46 pm

Great, so now I get to participate in a black market for gasoline, I’m sure there are not transactions costs there. It’s a total red herring to bring the rich into this at all, let along “grasping”. Rich has got nothing to do with a cheap commodity over a period of a few weeks. Anyone with a job can afford it at any realistic price.

GiT November 4, 2012 at 6:28 pm

There’s nothing black about a market in rations.

emerson November 3, 2012 at 6:42 pm

Some consumers would hate the stations with $10/gal gas. But the ones who really needed gas would love them. No lines, plenty of gasoline.

MikeJ November 3, 2012 at 9:45 pm

+1

Why an equal amount would seem the ‘fair’ or decent thing is bizarre to me – we have different needs and the truth about those needs is far and away best measured in our willingness to pay.

GiT November 4, 2012 at 2:32 am

Then trade your rations. What equal shares does is distribute the rights to the windfall profits/rents collected by those who hold oil during an oil shortage. It also ensures that those without sufficient wealth to meet the seller’s reservation price when under duress nonetheless have access.

Brian Donohue November 5, 2012 at 8:10 am

This strategy endorsed by Rube Goldberg.

Grahame grieve November 3, 2012 at 6:47 pm

Given the normal price elasticity of fuel, I’m surprised no one has factored this into the equation. People would still expect it to run out, and hoard anyway. In this context, where normal service will shortly be restored, and those same people will be customers afterwards, letting the fuel run out at normal prices is probably rational behaviour for the service stations.

OneEyedMan November 4, 2012 at 9:00 am

That sounds right. At Knowledge Problem, Michael Giberson notes that 16 states lack price gouging laws but there is little differential pricing response to disasters. Fear of customers appears to be more important than fear of regulators in this domain. Even if the market clearing price was $20 a gallon I wonder it would be worth the trouble you risk with your customers. My understanding is these tanks hold around 5-10k gallons and normally make about two cents a gallon profit. That would allow 850x normal profits, which if they turn over the tanks about 10 times a month is about 7 years profits. Sounds like a lot, but they actually make most of their money on convenience goods and washes, and people could pull this business. It just isn’t enough money. An extra $170,000 on a roughly half million investment seems like a lot until you make the front page and the ill-will pours in.

But maybe that’s a false consensus. If you always charge a low price and always have gas in stock for disasters, I wonder how long people would hold grudges for. I certainly have seen many a crowded restaurant with a prominently posted sub-par health rating, picketing workers outside, or even just reopening after being shutdown by the health authorities.

Dismalist November 3, 2012 at 7:32 pm

These are temporary negative supply shocks: Consumers will love the reputational considerations of suppliers…except those who have to go without.

mw November 3, 2012 at 7:33 pm

The solution obviously is to abolish the Fed.

Andrew' November 4, 2012 at 2:51 am

Ha! You couldn’t be more wrong!

What is needed is price bubble followed by a crash to quell any panic buying and speculation followed by a long recovery.

That is exactly what The Fed is good for!

joan November 3, 2012 at 8:10 pm

Gas lines are a disincentive to hoard that effect everyone equally while the disincentive provided by high prices will have little effect on people with high incomes. Since the high prices will not increase the supply during temporary shortages caused by natural disasters the economic justification for markets to determine prices do not apply.

Bernard Guerrero November 3, 2012 at 9:20 pm

“Since the high prices will not increase the supply during temporary shortages”

I think this may hold true for gas, which requires a great deal of working infrastructure and so would be quite supply-inelastic, but not for stuff like bottled water and foodstuffs where an adventurous (or patient) trucker or store-owner might expend some extra effort getting a supply into a high price area.

For that matter, setting aside non-working station pumps, is gasoline supply that inelastic in this circumstance? What would prevent one of said parties from arranging to take a tanker of gas from a midwestern refinery into NJ? Most of the roads are still ok.

Brent November 3, 2012 at 8:22 pm

I don’t see what his point is. If my station raises the price, fewer people line up there… but I have gas for those who do… other stations see that I have customers paying the higher price (because they don’t want to wait in line for hours or days, burning fuel while they wait)…. other stations start raising their prices, too. That’s how it works. Of course, if I raise the price too high, I see I have no customers and I lower my price, giving the opposite signal to everyone else.

anon November 4, 2012 at 11:50 am

Of course, if I raise the price too high, I see I have no customers and I lower my price, giving the opposite signal to everyone else.

Paraphrasing some of the other commenters here:

You heartless, greedy, grasping bastard! That’s not fair! You bastard!

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Dismalist November 3, 2012 at 9:02 pm

Let’s generalize the situation, but not too much:

In the face of temporary negative supply shocks, to what extent is it efficient to suspend private property rights? In the face of temporary negative supply shocks, is the market or the government better at handling the situation? [We don’t want a “grass is greener” fallacy.]

My own answer is that government should let the market work as best it can, even with a temporary supply shock, but step in to supplement supply. That’s just a kind of insurance policy that no private insurer can provide. Only the Feds can forcibly order supplies to a closed harbor, and such.

Main point is that if government can’t increase supply, then it’s not worth the candle.

Andre November 3, 2012 at 9:22 pm

You guys have a lot of confidence in the rule of law not temporarily breaking down in these intense situations. I’m sure it’s not easy to model – but what do you think is the risk that some enterprising individuals decide to just take your gas at any given price? If the signal is sent that people are willing to pay $15 for a gallon of gas what investment will a gas station owner need to make in extra security to see his suddenly very valuable supply isn’t looted?

Studies with monkey’s measuring their reactions to unfair rewards are pretty popular these days. Anyone want to run an experiment with humans? Start selling $20 dollar shovels for $200 right after an natural disaster and see how long your stack of shovels remains yours?

NRA November 4, 2012 at 9:52 am

If you own a store, own a gun.

jmo November 4, 2012 at 10:06 am

One owner with a gun isn’t going to do much against 10 guys with guns or an angry mob composed of x% of people with guns.

Cliff November 4, 2012 at 12:51 pm

LA riots?

Rahul November 4, 2012 at 1:59 pm

Did the rioters have guns?

Cliff November 4, 2012 at 12:51 pm

Is this a variation on the classic progressive argument of “if you don’t do what I want you to, people like me will murder you”?

Bill November 3, 2012 at 9:41 pm

Oh, economists. They have no sense of the real economy and long run profitability and goodwill.

Here is a lesson you would get in a graduate course on pricing from a Harvard Business case study on soft drink pricing.

Here is the example: A vending machine that would change price based on the outside temperature and availability of nearby vending machines. At high temps, the price of softdrinks would rise.

Guess what: consumers got really pissed at Coca Cola and stopped purchasing during the more temperate time.

Sometimes, if you value a long term relationship, you do not engage in temporary price discrimination, particularly when the customer faces an event not of their choosing. There are reasons gas stations do not raise prices. And, they didn’t have to attend graduate school to learn or anticipate the lesson.

MikeJ November 3, 2012 at 9:53 pm

Walmart right now is trying to develop panels that change prices throughout the day depending on shifts in supply and demand… as does Amazon and of course in a way Ebay. Tell me again how those guys don’t understand real world business?

Do people get pissed off by gauging? Yes, but I think mainly to the extent that they see it as rent seeking where there is not room for competition. Gas markets have competition so people would come to realize that this was related to a supply and demand effect and not just simply a ‘greedy’ bastard who happens to be sitting in a sweet spot. It would be even better if there could more easily be additional competition – imagine gas tankers setting up on the roadside and letting people refuel directly (probably not realistically safe but it captures the idea – if competitive arbitrage opportunities exist, I don’t think we’ll have a class war just yet)

Andre November 3, 2012 at 10:06 pm

If you could easily bring in more competition how long could you manage to maintain high prices? Sure that would help solve one problem since those random gas tankers don’t have to worry about repeat business, but if their weren’t literal, physical barriers to entry you wouldn’t be able to maintain high prices for long.

Bill November 3, 2012 at 10:09 pm

Mike,

Walmart dynamic pricing is not the issue. Prices are posted and you have choice. Dynamic pricing also will be moving to the grocery store with electronic price tags in the future.

The Harvard case study involving vending prices dependent on the weather really pissed off consumers…the vending machine was not going to empty if the weather were hot even at the everyday price. So, what happened: consumers really got mad at Coke because they didn’t view themselves as controlling the weather.

Imagine if you bought airline tickets that permitted a surcharge if the airport was locked in by a storm. To clear the market of stranded passengers, the airline would be able to add a congestion surcharge. What would the consumer reaction to the airline be?

The converse of the situation also arises when companies do not raise prices because of, say, as sudden temporary oil price increase because they do not wish to incur the wrath of their customer. This provides an opportunity for switching…and its hard to get a customer back if they perceive you as taking advantage of them (such as in the hot weather-Coke example). In those circumstances, what you sometimes see is contracts with fuel adjustment clauses tied to a third party posted price, so that it is clear that the vendor is not changing prices because of some unanticipated demand, but rather solely on the basis of input costs.

Andrew' November 4, 2012 at 2:56 am

Bill,

If Coke is not relevant to Wal-Mart, then how in hell is it relevant to gasoline. What say you, king of the cult of single-study?

But you actually agree exactly with that point with the blurb TC posted.

So, what the government could do, if they actually wanted to help is to announce that prices would be rising. They could say that they will be instructing gas stations to price gas to reflect demand to

They might also announce a holiday in the gas taxes. That is, if they really wanted to help. But I haven’t heard a single thing out of Bloomberg ever that didn’t sound to me like political expedience, and Cuomo sounds like he learned his economics from law school and Bloomberg.

Andrew' November 4, 2012 at 3:01 am

They might have to whip out some of their bushwa about “speculators and hoarders” and how people are buying too many units at the low price. So, in order for you to have gas, you have to pay a higher price. They could use the analogy to how scalpers can buy too many tickets when they are priced too low. That is if they really wanted to help.

My favorite joke is the one about the hardware store guy who says “well, when I’m out of stock, I’ll sell mine cheaper too.” Sure people will be pissed, but much of economics is about explaining how people are irrational. If you are willing to pay more, then you should be happy to get more than 10 gallons. Or, you pay by waiting in multiple lines. It’s still paying.

Andrew' November 4, 2012 at 3:21 am

BTW, Coke has a very unique product.

In fact, Warren Buffett would probably call it the world’s most unique product. I suspect he doesn’t even understand all the reasons why, and he understands better than probably anyone and probably far better than Coke’s management.

So, I’m not against you guys always picking the worst of all possible examples, just do it with a little less arrogance, please.

I_Affe November 3, 2012 at 10:32 pm

I used to live about a mile away from an ice cream store that offered discounts based on the temperature, the lower the temperature the lower the price. Ice cream tastes just as good in January as it does in July.

Brian Donohue November 4, 2012 at 1:20 am

Lomg-term relationship with gasoline supplier? LOL.

Andrew' November 4, 2012 at 3:42 am

The point I’m making above, a bit too sarcastically I admit, is a study about Coke is first-and-foremost a study about Coke. It may be the least universal analogy one could find for a product that is so fundamentally brand-loyalty dependent. People certainly do get mad about what they consider price gouging (why we are having this discussion). How much this might hinder distribution I don’t know. I’d be worried about sabotage more than a loss of long-run goodwill. Our job is to figure it out and explain it to people so they don’t cut their noses off to spite their face.

byomtov November 3, 2012 at 10:21 pm

Breaking the hoarding equilibrium would have required a coordinated price hike that both allocated fuel to its highest valued uses and told everyone that there would be fuel available for them in an emergency if they really really needed it.

Amazing how easy it is to translate “are willing to pay for it” into “they really really need it.”

In an economy where people differ widely in available resources, which is to say most economies, those actually are two different things.

GiT November 4, 2012 at 2:41 am

You forget, inequality doesn’t exist and even if it did it would have no consequences whatsoever.

/sarc

Andrew' November 4, 2012 at 4:10 am

The questions are (1) what is the effect and (2) can the government improve on it?

Actually, those questions should be reversed in my opinion. Your assumption seems to be that people are going to buy gas based on their wealth. First, you seem to categorize people into buckets of wealthy or poor. You seem to spend a lot of energy worrying about that people in your wealthy bucket will get more than their fair share of gas. I think that paradigm is not reality-based.

But I’ll work with you. First, are we talking about people not getting gas at all, or are we talking about the rich driving up the price so as to be extractive from the poor?

I’ll grant that in an emergency situation having more money could allow people with more money to buy more gas. But would they really do this to an extent that makes economic rationing far inferior on net than bureaucratic rationing? However, a price control is not better than bureaucratic rationing because the rich can still hoard with a price control. In fact, the not-so-rich can hoard very effectively with a price control. So, not all bureaucratic interventions are equal. However, I’d say that it is not a foregone conclusion that making the poor spend their time in lines is superior with a bureaucratic quota ration. We could find out by letting the price float while having a few government distribution centers for what gets trucked in by the government.

D November 4, 2012 at 8:24 am

Two problemsI see with that–It doesn’t change the fact that stations may not be willing to raise their prices because of long-term reputational costs, and I’m not sure the gov’t could/would set up enough distort centers to meaningfully affect the market, though I might be convinced on that point. On ther former, it stills requires a gov’t imposed price increases or a mid-disaster gov’t PR push on market economics, both political non-starters.

byomtov November 4, 2012 at 10:12 am

Your assumption seems to be that people are going to buy gas based on their wealth.

Well, yes. That’s the way it is with most things. Rich people tend to buy more shirts, say, than poor people.

First, you seem to categorize people into buckets of wealthy or poor. You seem to spend a lot of energy worrying about that people in your wealthy bucket will get more than their fair share of gas.

No. I’m not doing either of those things.

As for the rest, stop with the libertarian rant and read what I said.

Need and willingness to pay are not the same thing, because willingness to pay depends on resources. Argue all you want about the benefits of price-gouging. That’s not what I was addressing. I was simply saying that the unthinking equation of those two characteristics is a mistake. It’s an easy way to avoid thought, while pretending to be rigorous.

Cliff November 4, 2012 at 12:55 pm

They are often the same thing. Particularly for low-cost items.

D November 3, 2012 at 11:30 pm

I think Joan hit on the answer to what I couldn’t wrap my head around on the Econ hoarding posts I’ve read. The price-based equilibrium does not result in those who need the gas getting it–it results in gas going to those for whom the marginal value of the gas matches the marginal value of one more dollar. I live in the city, so don’t use that much gas to start with, and I’m relatively affluent. As a result, my demand for gas is pretty in elastic relative to price, even if I don’t really NEED it. On the other hand, someone who has to drive every day to lower paying job is much more sensitive to price change, even if their absolute need is greater.

On the other hand, I do value my time, so I’m not going to sit around in line waiting for gas unless I do really need it for some reason. Same for someone with less money but who has to drive, because they have the same access to the resource of time that I do.

My conclusion–price gouging laws result in markets that still clear efficiently, but the price is set in time rather than money, which strikes me as a much more equitable measurement of need in these situations.

Andrew' November 4, 2012 at 3:09 am

You aren’t really talking about a survival situation. If people really were in survival mode, time would be much more valuable even for the poor.

Hoarding prior to a survival situation for a survival resource is a GOOD thing.

d November 4, 2012 at 8:12 am

i don’t think we are talking about a true “survival” situation. If it was about survival, you would use that first tank of gas to get to someplace where you can survive, such as the exodus from New Orleans after Katrina. if I’m sticking around and hoarding, it’s because I think I can make do long enough for things to settle out.

The Anonymouse November 4, 2012 at 2:33 pm

The problem is that, to a certain sort of mind, ‘emergency’ can be spun out to cover anyone you want to cover. I would posit there is a concrete difference between the trauma surgeon who needs to transport herself to her workplace and the call-center employee who ‘needs’ to drive to work because he needs that paycheck. I have sympathy for those whose lives would be disrupted by lack of access to gasoline, but too quickly we get in the weeds by the spinning off of hypotheticals.

Cliff November 4, 2012 at 12:57 pm

So someone with a minimum wage job wouldn’t pay an extra $20 for their gas to save the two or three hours waiting in line? I doubt that. It’s not efficient.

d November 4, 2012 at 8:03 pm

NJ minimum wage is $7.25, so waiting 3 hours is a wash vs. paying an extra $20, and that’s before payroll tax.

Michael H. November 4, 2012 at 12:10 am

Food is scarce on Staten Island, let’s do the same thing with food. People who really want to eat can pay the high prices, and that way there will only be food for the wealthy. The rest and their stupid babies can wait til they die.

If we force the prices to stay the same, some of the wealthy who can afford $50 hamburgers might not get one because the stupid poor people might buy them all up, and some wealthy people may get hungry. We can’t have that.

Doug November 4, 2012 at 1:14 am

But this already happens: Here in Jersey City, the large supermarkets have almost no milk on the shelves–no cow’s milk–but they have plenty of organic soy milk, which is twice the price. The same is true for bread and meat.

Perhaps a better example is between large supermarkets and corner bodegas. The supermarkets are mostly out of staple goods like bread & milk; the bodegas, which charge more–people pay for convenience–are not.

This segmentation is what a number of us are proposing for gas stations.

Andrew' November 4, 2012 at 3:07 am

1. Only food for the wealthy seems like a silly assertion. Cornering the market on food would be foolish and probably impossible.
2. Realize that you are already amongst the wealthiest on the planet.
3. Many people choose not to liver there because of the high cost of living.
4. The wealthy are probably not going to hoard perishables beyond their needs. They didn’t get wealthy by making loss decisions with money.
5. All the rest of the economics, like that food will be brought in from elsewhere if people are compensated to do so, etc.

Eric Crampton November 4, 2012 at 12:50 am

Hit Tyler’s link and note the solution I had recommended. You might be surprised.

Rahul November 4, 2012 at 2:02 am

How do we know what point to set this Special Tax at so that the market clears optimally?

Claudia November 4, 2012 at 6:43 am

Eric, I had a higher opinion of your analysis from the excerpt here than your full post. Yes, I was surprised that you called consumers after a natural disaster idiots (some might call them survivors), you talked about ‘stupidity constraints’ keeping us off the price gouging equilibrium, and your nod to equity was helicopter drops of money to poor neighborhoods. I have immense respect for markets and the price mechanism…but I see limits in some contexts and I don’t think that’s me hitting a stupidity constraint.

Eric Crampton (@EricCrampton) November 4, 2012 at 9:08 am

Claudia: I’d proposed a temporary doubling of petrol prices via an excise hike where collected revenues would go to earthquake relief: hardly an equity-be-damned policy.

Note further that the de facto policy of freezing prices effectively helped the rich and screwed the poor. Why? Christchurch’s more affluent live on the west side of town. That side of town got off easy in February’s quake. Power and services stayed on; grocery stores were running. And their petrol stations were going, albeit with horrendous queues for those stations that didn’t run out of fuel. So the rich folks went, sat in queues, and topped up the tanks on their cars (and filled the gerry cans in the back). The east is the poorer side of town and that got killed in February. No water, no power, no working sewerage, no grocery stores. Council was pretty quick in getting water tankers out, but that was about it. The folks on the east side of town typically keep very low fuel balances in the tank. When I fill up in the east, everybody else is putting in $10-$20 instead of filling the tank. That means they had pretty much no chance of getting across town to where there were groceries. If they could get to the other side, they wouldn’t be able to get the fuel to get home with supplies. If prices had doubled, it wouldn’t have been that hard for neighbours to pool together to send one car out to get groceries. With prices fixed, there instead was high risk of having to abandon the car and the groceries for lack of fuel.

In the specific case of Christchurch, a strong temporary price hike would have been more equitable than the price freeze we had instead.

Claudia November 4, 2012 at 9:31 am

Why should the residents in a disaster hit area pay for their own disaster relief in real time? Not that equitable I would argue. Seems like a cost that should be spread across a nation or at least a locale over time (social insurance).

Also note that response here is not just steady prices, but also rationed free supply. A good friend in NJ posted on FB that she saw a convoy of 15 gasoline tankers with police and military escorts headed north on the NJ turnpike this morning…followed by a convoy of electrical trucks. Governments can muck up disaster relief and attempts at fairness can go astray, but the price mechanism is not a cure all either.

Cliff November 4, 2012 at 1:01 pm

Why should people who get struck by lightning pay for their own disaster relief? Seems like it should be spread out over the nation. How about people who trip and get injured?

What if instead, the tax is returned to the people of that area? Pretty much the same deal, right? The tax improves the peoples’ lives and it has to go to someone.

Claudia November 4, 2012 at 1:21 pm

You’re right Cliff, a major storm that busts through the several states, affects millions of people, and causes billions of dollars of damage is just me tripping and twisting my ankle. How about this twist on your proposal…federal taxes that have already been collected are used to temporarily pay for some of the gas. Oh yeah, I think that’s what they’re doing. Clever, huh?

Rahul November 4, 2012 at 1:27 pm

@Claudia

The primary point here is that a FIFO queue is not the socially optimal way to allocate a scarce resource.

What’s your way around that?

Claudia November 4, 2012 at 1:42 pm

Nor are natural disasters. My push back here is not my bleeding heart side it’s my pragmatic side. I am all for dreaming up first best efficient or social welfare maximizing solutions. But let’s be honest about what is feasible in a crisis.

Eric Crampton November 4, 2012 at 3:16 pm

Free tankers? Why not free ponies at the same time. Ones that fly. The only petrol in Christchurch until about a week after the earthquake was the petrol that was in Christchurch at the time of the quake. It took a few days to get the Port of Lyttelton operational again to accept fuel, it took time to get petrol tankers to Timaru and get the logistics sorted to get the truck hauling up to Christchurch. I wanted the tax for the interval. But you can go ahead and assume whatever can openers you like.

GiT November 4, 2012 at 6:33 pm

“The primary point here is that a FIFO queue is not the socially optimal way to allocate a scarce resource.”

This depends on whether people’s time or their money is a better reflection of the utility they gain from a gallon of gas. If the price mechanism gives all the gas to people who gain only a little utility, and prices out those who would gain a lot, then sortition may do better.

maguro November 4, 2012 at 9:32 am

I like the temporary excise tax idea, but it doesn’t seem practical in a democracy. The last thing the politicians will do is accept responsibility for drastic price rises during a crisis. Much better for their career propects to demagogue the situation and blame the suppliers for price hikes and/or shortages.

It might be workable somewhere like China, though.

Marc November 4, 2012 at 1:51 am

Theory vs practice: it doesn’t seem you know what it feels like to be poor and/or powerless. Hoarding represents action to shore up survival despite powerlessness too you. Make sure you keep that practice inundated too you know, proffessori

Andrew' November 4, 2012 at 3:15 am

Wait, what? So are we talking about the rich hoarding or the poor hoarding?

First of all, we are talking about getting the gas to the people who really need it. Do you believe that or not?

I think of it a bit like a bank run. The Fed actually should do a helicopter drop. What better investment differential return could there be than the difference between productive people surviving or not surviving, or at least moving from survival mode back to productivity mode. Do we even have a monetary disaster policy?

D November 4, 2012 at 8:36 am

building on the bank run analogy, isn’t the simplest solution for the federal government to inject extra supply directly into the market? The disaster is really limited to a couple areas in NY/Nj, so buy gas from PA, VA, wherever, and truck it in to provide to local suppliers at market cost. Prices might go up nationally, but I doubt it would be much since net national demand hasn’t really changed.

DocMerlin November 5, 2012 at 2:01 am

Government? why would we need the government to do it? As prices rise gas companies will do it on their own! Thats what prices are for!

John November 4, 2012 at 1:53 am

Commenting from north shore Long Island, there really isn’t any noticeable hoarding. People in line with gas cans are putting it straight into generators or cars parked else where because they are empty or don’t have enough fuel to get through a mile long gas line. Long Island is very car-intensive and thus has notoriously inelastic demand for gas. Text book micro says a supply shock with vertical demand curve won’t reduce quantity, only raise prices and thus not reduce gas lines. It would only take money from those who can least afford it to give retailers a wind fall. You may believe that is a just outcome but it won’t help gas lines at all.

prior_approval November 4, 2012 at 2:38 am

‘Text book micro says a supply shock with vertical demand curve won’t reduce quantity’

And economists are also famous for always having can openers available

The quantity has been reduced, and it will not be replenished in less time than it is physically possible to restart refineries, pipeline, and terminal operations.

This is where the assumptions of economics, or at least how most people view it in the today’s U.S., are just a fantasy. Oil supplies in the region affected by Sandy are drained, and there is no way to magically double refinery throughput or pipeline capacity by waving pieces of money around. A tanker (either the wheeled or floating variety) cannot be in two places at the same time, and be always full.

A broad term for this entire theme is ‘logistics’ – sadly, one of a large number of areas of highly developed human knowledge, refined over history through practical experience, that economists tend to remain either unaware of, or uninterested in.

Cliff November 4, 2012 at 1:04 pm

Supply won’t increase (in the short term- long term it would if “gouging” were allowed) but it will move from areas of less need to areas of greater need. So, same result right.

D November 4, 2012 at 8:43 am

I can see that there may not be much hoarding in the traditional sense of keeping a bunch of full gas cans around. But what do folks think about the impact of generators? That actually gets at the mid level in the “rich/poor” dichotomy some people pointed out in the discussion. In my experience (yes, anacdetotal, but does anyone know about full studies on this?), generators are used by people in the middle to upper-middle income brackets to ensure a minimum comfort level after a disaster. for example, I had relatives who lost power for over a week in storms last year. So they moved in with relatives who still had power. Then they bought a generator, so the plan was to stay put if they lost power this time. net result would have been an increase in local demand for gas. The decision it was more about comfort and convience than true need or survival, but probably very inelastic to price.

US November 4, 2012 at 4:42 am

Let’s see… 1 gallon: ~3,8 liters. 1 dollar: 5,8 kroner. $10/gallon = ~15,25 kroner/liter.

In Denmark gas prices are around 12 kroner/liter (~$7,9/gallon). A few months ago (17th of August) the price peaked at 13.9 kroner per liter (95 octane) – not because of hurricanes or anything, just part of the normal price variation.

I don’t care about this kind of stuff, just thought I’d provide the data.

Marc Roston November 4, 2012 at 11:45 am

This New Jersey resident proposes a fun-for-economists solution:

Crisis contingent vouchers!

A state issues a freely traded voucher to each licensed driver. Upon declaration of an emergency, the vouchers authorize the holder to a share of the available gasoline, based on the number of outstanding vouchers. Think of the voucher, once emergency is declared, as a gasoline backed currency, with all the implications, both good and bad, of such a strategy.

The pre-crisis trading will reflect the expected value of a gasoline during a crisis, the expected probability of a crisis, and the risk of contingent currency devaluation (e.g. the governor prints vouchers to fuel police cars, for example.)

Admittedly, this does not solve the problem of allocation of gasoline across the state, but it certainly goes a long way to solving the waiting in lines.

Lastly, the data produced by 50 independently functioning currency markets from a monetary policy perspective (e.g. I expect Florida has greater inflation credibility than Kansas because Florida has more likely repeated play,) and exchange rates (I live in New Jersey and hour and a half from PA…do I own some PA gas vouchers as well to ensure I can drive far enough away??) will keep PhD students busy forever!!

mulp November 4, 2012 at 6:50 pm

Dan Ariely discussed a related topic on Marketplace weekend:
http://www.marketplace.org/topics/life/weather-economy/how-people-behave-after-crisis-hurricane-sandy

He describes an experiment he ran, giving away v selling premium candy, that suggests that if you give away free water at a community center, the people who buy a lot of water when they find it at the store will only take what they need for free from the community center.

A possible conclusion is the free FEMA gasoline will be distributed based on need, — in the community –.

He also touches, why people rebuild after a disaster instead of abandoning the community — you don’t abandon your community even if you only became part of the community in the disaster.

JonF November 4, 2012 at 8:49 pm

In the context of a disaster I don’t think markets can clear: there is no price which will open up the clock supply chain, or restore power to stations that are dark. And the station owners are correct to worry about long term damage to their reputation. Human nature is what it is (as the Communists learned); you cannot trump it with economic abstractions cribbed from the con 101 textbook.

Larry November 6, 2012 at 1:28 am

What would the response have been if a station put up this sign:

“We’re charging high enough prices that there are no lines. We’re donating our excess profits to the Red Cross. Buy all the gas you want!”

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