RSSWalter E. Williams Explains “Price Gouging” Myth
J.J. Jackson | June 4, 2006
Some readers have said that my explanations of “Price Gouging” as a myth are far too long and complex to be correct. Their theory is that if it takes me a two page article to explain why it is a myth then I must be spinning. The truth of the matter is however that economics is simple AND complex.
It is simple in the fact that economics is fairly intuitive. It is complex in that many people lack the intuitiveness to understand it due to the way they have been educated and the fact that many of them have never even taken an economics course. The latter is why I have written two long articles about price gouging being a myth. it takes time to deprogram all the misinformation that has been shoved into people’s skulls over the years.
But for those of you that need your information in easily digestible sound bite sized chunks, Walter E. Williams explains it in a very short and concise manner in his May 31st article ECONOMICS OF PRICES
Here’s what one reader wrote: “Williams, I can understand how the destruction of Hurricane Katrina and Middle East political uncertainty can jack up gasoline prices. But it’s price-gouging for the oil companies to raise the price of all the gasoline already bought and stored before the crisis.” Several other readers made similar allegations. Such allegations reflect a misunderstanding of how prices are determined.Let’s start off with an example. Say you owned a small 10-pound inventory of coffee that you purchased for $3 a pound. Each week you’d sell me a pound for $3.25. Suppose a freeze in Brazil destroyed half of its coffee crop, causing the world price of coffee to immediately rise to $5 a pound. You still have coffee that you purchased before the jump in prices. When I stop by to buy another pound of coffee from you, how much will you charge me? I’m betting that you’re going to charge me at least $5 a pound. Why? Because that’s today’s cost to replace your inventory.
Historical costs do not determine prices; what economists call opportunity costs do. Of course, you’d have every right not to be a “price-gouger” and continue to charge me $3.25 a pound. I’d buy your entire inventory and sell it at today’s price of $5 a pound and make a killing.
If you were really enthusiastic about not being a “price-gouger,” I’d have another proposition. You might own a house that you purchased for $55,000 in 1960 that you put on the market for a half-million dollars. I’d simply accuse you of price-gouging and demand that you sell me the house for what you paid for it, maybe adding on a bit for inflation since 1960. I’m betting you’d say, “Williams, if I sold you my house for what I paid for it in 1960, how will I be able to pay today’s prices for a house to live in?”
Ok do you get it now? Can I stop responding to the same ignorant emails about how price gouging is real and big oil is EVIL emails from all you left wing nuts now?
Probably not. For some the deprogramming just takes longer.
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(Book)
Authors:Walter E. Williams
Manufacturer:Hoover Institution Press Released:April, 1999 |
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(Book)
Authors:Walter E. Williams, Hoover Institution Press
Manufacturer:Hoover Institution Press Released:July, 1995 |
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