A Fair Price

by Russ Roberts on September 22, 2005

in Prices, Reality Is Not Optional

The topic of gouging continues to occupy conversation and the news.  My gas station’s price, btw, is down 39 cents from the peak two or so weeks ago.  One theme I keep hearing is that it’s one thing to charge more than you paid for something—that’s OK, that’s a profit.  Gouging is when you charge a lot more.  By what right (asks the critic) can a gas station owner or the oil company charge so much more?

Right has nothing to do with it.   It’s an interesting thought.  We can allow prices to rise "a lot" or we can’t.  But before we take away that "right" we ought to remember one thing.

The reason the price goes up is because without the price rise, there isn’t enough gasoline to go around.  If you decry gouging, you are asking for gas stations to run out of gas at unknown times of the day, ruining people’s plans to get to work, go to the hospital, take a pleasure ride.  You are asking for lines to form that make it hard to plan those trips.

Suppose you show up at your regular gas station tomorrow and find the price is $10 a gallon.  What’s going on, you ask.  "My daughter’s getting married in a month.  I didn’t realize how much it was going to cost.  I need to make more money this week."  Does the owner have the right to charge $10?  Sure, and you have the right to shop elsewhere, which you will unless you feel really sorry for him or know him well.

Suppose you show up at your regular gas station tomorrow and find the price is $10 a gallon.  What’s going on, you ask.  "I made a bad deal with my wholesaler.   I overpaid.  To cover my costs, I need $10 a gallon."  Does the owner have the right to charge $10?  Sure, and you have the
right to shop elsewhere, which you will unless you feel really sorry
for him or know him well.

Suppose you show up at your regular gas station tomorrow and find the price is $10 a gallon.  What’s going on, you ask.  "I know it’s a lot.  But I bought the gas two weeks ago when it was really expensive.  I know it’s cheaper now and everyone else is charging less, but I need to cover my costs."  Does the owner have the right to charge $10?  Sure, and you have the
right to shop elsewhere, which you will unless you feel really sorry
for him or know him well.  (HT to Zev Fredman for pointing out this example.)

What you pay for something does not determine what you can sell it for.  This is the reality in a market-based economy.  There might be times as buyers that we wish it were otherwise.  There might be times as sellers that we wish it were otherwise.  But that is the reality.  We can change that reality, of course, with regulations.  But we can’t change it one piece at a time, such as leaving everything else the same, except for the price.  That option is not available.

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