Loving the Gouger

by Russ Roberts on February 6, 2009

in Prices

From Reason comes the tale of David Strange, the generator man, bringing electricity to people in the wake of ice storms in Kentucky:

Enter David Strange, the enterprising figure the Associated Press calls the "generator man."
Strange drove the hills and hollows of backwoods Kentucky delivering
and setting up generators to those without power—at a $50 to $100
mark-up over retail. Willing customers included a dialysis patient and
a powerless 80-year-old woman dependent on an oxygen system. They
called him a "godsend," although Strange prefers "jack of all trades"
or even "hustler." To Adam Smith, he would be recognizable as an agent
of the invisible hand.
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{ 26 comments }

tw February 6, 2009 at 3:17 pm

Given the state of our country, how long before he's investigated by the Kentucky Attorney General for "price gouging"??? I'm sure somebody has already complained to a politician about "that unfair $50/$100 charge."

muirgeomuirgeo February 6, 2009 at 3:57 pm

No power for over a million homes for one month in the middle of winter?

Sounds like some one could use a little infrastructure.

I'm not sure if this is supposed to be a story of Aerican Can Do or of the failure of modern recent policy. I'd say the later.

Ike February 6, 2009 at 4:17 pm

Muirgeo –

Do you have any idea what you are talking about?

Trees that ice over, dropping massive weighty branches on power lines are NOT an infrastructure issue for the federal government.

We could build power transmission and delivery systems that would never fail — and you would never be able to afford to turn on your lights.

Marcus February 6, 2009 at 4:25 pm

muirgeo, I live in Kentucky and you haven't the slightest fucking idea what you're talking about.

Sam Grove February 6, 2009 at 5:08 pm

muir, you do realize that most locales in the U.S. are served by -government granted monopoly- power utilities, don't you?

Quebecquer February 6, 2009 at 5:11 pm

Muirgeo, I live in Quebec, where we have a nationalized electricity provider. In 1998, we had an ice storm and part of the province was out of power for over 6 weeks (in January/February). Find another battle.

ChrisF February 6, 2009 at 5:14 pm

I think muirgeo is suggesting that this is the sort of thing that Obama's stimulus bill will prevent in the future.

If only he were right — paying people to cut limbs away from branches has a lot more economic benefit than most of the screwy things in that bill. $88M to build schools in Milwaukee, which is shrinking and, thus, has a bunch of empty schools it's not using? Zoiks. Meanwhile, areas of North Carolina can't build schools fast enough. (Not that I think the Feds should pay for those schools. But, if they're going to pay for schools, at least put them where they're needed.)

Sam Grove February 6, 2009 at 5:16 pm

Maybe if the government had not subsidized rural electrification via the REA, perhaps many would have avoided dependency on centralized power distribution.

Many windmills went into disuse after subsidized electricity became available.

muirgeomuirgeo February 6, 2009 at 5:35 pm

Where I live there are no above ground power lines. No problems… you all might want an upgrade.

If you are denying that are national power grid is A-OK YOU are the ones who haven't a clue about what you speak.

Eventually we'll have power as reliable as they do in Iraq and you slowly warmed frogs will be just as happy.

I lived in St Louis for 25 years AND never had a prolonged black out like that.

save_the_rustbelt February 6, 2009 at 5:40 pm

Actually, considering time and transport, he is probably underpricing his services.

Not at all the classic gouger.

Selling the generator for a 300% markup at the store, now that is more like gouging.

Mezzanine February 6, 2009 at 5:43 pm

Everything is a federal issue for muirducks. It's part of his Soviet mentality of "can't trust the locals".

Richard O. Hammer February 6, 2009 at 5:43 pm

In 1996 a hurricane knocked out power for several days in a big part of North Carolina where I live. I wrote on op-ed piece, developing our subject, but I do not recall if it was ever published.

I append it here. Substitute "ice storm" for "hurricane".

Government sure gets to strut during these days of hurricane crisis. But government, I believe, has worsened the crisis. While sitting in darkness I have imagined things. Join me.

I see a business which specializes in supplying emergency electricity in situations such as this. Located somewhere on the east cost, where it can reach disaster scenes all up and down the coast, this business owns a fleet of pickup trucks, each carrying a diesel generator. When a hurricane is forecast to make landfall, the fleet heads for the scene. The crew on each truck comes competent and equipped to connect their generator to a branch which has been severed from the central source of power. And they come with fill-in-the-blanks contracts, offering customers along that branch an opportunity to buy some of this electricity, for a premium price of course.

Okay. Come out of hypnosis now. Reenter this world. Are you ready for a quiz?

Why does no such business exist?

Government, that's why. First government creates a problem by granting monopolies to electric utilities. No businesses, other than these utilities, are allowed to retail electricity. Then, trying to protect us from the consequences of its first mistake, government requires retailers of electricity to seek regulatory approval of rates. Our imaginary business has no chance of getting off the ground.

My economics professors drilled a lesson into me. When markets are free entrepreneurs normally fill demand with supply. The price which entrepreneurs ask for a product may cause buyers to complain. But buyers often forget a simple reality: partners in a voluntary trade must foresee that the trade will improve their lot; otherwise they would not choose to trade. Entrepreneurs offer buyers a choice which the buyers would not have otherwise. Here in Hillsborough, while electricity was out, a few gas stations got portable generators so they could run their pumps. Motorists formed long lines at these stations. Gas was available.

But electricity was not available. For a few days there were hundreds of thousands of customers in North Carolina who, I guess, would have gladly paid $5 per kilowatt hour (that is 50 to 100 times the usual rate) for a trickle of power, to keep refrigerators and reading lights going. But the failure of any business to move into this market indicates, surely, the unintended side effect of well-intended government regulations.

Notice that some customers of electric utilities have purchased generators for their own use in emergencies such as this. These customers desire protection from a loss of power and, contrary to economic sense, have chosen to purchase a generator which they may never use. Economic sense would suggest there should be some institution to help them share the risk, and the cost of the generator, with others who face a similar risk.

The business we have imagined would be such an institution — if it were legal. The customer need not buy a whole generator, but just temporary use of someone else's generator for the duration of the emergency.

This leads to another point which I invite you to consider. Government prohibits the insurance industry, like the electric power industry, from offering many services which might benefit consumers. Insurance could, if deregulated, lessen the impact of the loss of electricity in a crisis. And the first businesses to see that they could profit by selling electricity insurance might be the utility companies themselves.

Suppose customers could choose to purchase more reliability. But no, government, judging itself wiser than we, has ruled in this regard. We are allowed only one choice, only a single level of reliability. That is, utility companies are compelled by government to sell what they have, at the price set by government, unless they have some government-acceptable excuse, such as a hurricane, in which case they may sell nothing at all for as long as the excuse lasts. Utility companies are not permitted, to my knowledge, to also sell insurance: a guarantee that either service will be continuous or the utility will pay compensation.

If utilities were permitted to sell electricity insurance, then I guess that most people with a significant amount of food in a freezer would buy such insurance, and the utility companies would find themselves motivated build in more provisions for backup power in a crisis. Perhaps utilities would sign subcontracts with that business which operates a fleet of generator trucks. In any case, the whole industry would shift in practical ways to minimize loss and provide more backup power. Such a shift awaits deregulation.

Kurt Koller February 6, 2009 at 8:18 pm

Your buddy Munger would enjoy this. Good stuff. Have him on the show again soon.

Ray G February 6, 2009 at 9:02 pm

If there's a failure of infrastructure, it's a government failure.

Anyway, great piece.

That should be added to the little collection of teaching aides we all know about by now. Hurricane Andrew for price gouging, the POW camp for middlemen, Katrina with Walmart versus govt aid, Salvation Army versus Red Cross, etc

BoscoH February 7, 2009 at 12:12 am

Wow George. You should hit Yahoo! Answers before telling the rest of the country how to do its electric lines.

http://answers.yahoo.com/question/index?qid=20071210051117AAmaCzj

You go Big Spender!!

BoscoH February 7, 2009 at 12:20 am

Oh, and reading some more down that Yahoo! Answers thread… I am reminded about an incident 6 years ago in my comfortable suburb with all underground utilities where a driver veered off the road and clobbered a pedestal serving a few hundred homes with phone, cable, and electricity. The power was out for 4 days.

Really George, you need to come up with a self-imposed penalty for spewing such ignorance. If you can't see that a decision about above ground versus below ground electricity transmission is about trade-offs, then you don't belong in any discussion of economics. Sorry dude.

Tom February 7, 2009 at 11:16 am

Reminds me of the essay by James Doti called the Great Snowstorm…one of the most influential essays I have ever read.

maximus February 7, 2009 at 12:44 pm

"If you can't see that a decision about above ground versus below ground electricity transmission is about trade-offs, then you don't belong in any discussion of economics."

It probably wasn't a trade off in California where he claims to live. Many builders are forced to bury the lines by the municipalities as part of the approval process. The extra cost is then passed on to homeowners and taxpayers. Hope he's happy.

BoscoH February 7, 2009 at 2:42 pm

Fair point maximus. However, trade-offs should come into edict making. My city actually has a mix of above and below ground utilities. Just as we've had a big blackout when someone smashed their car into an important pedestal, we've had lengthy (but not as long) blackouts when people hit poles.

I take exception to George asserting that underground is better. It's definitely more costly to lay, perhaps 5x to 10x. It would definitely make us poorer to do everything underground, especially when the frequency of a disaster like Kentucky had (where is Obama, BTW?) is lower then the expected service life of those lines. And underground is not a panacea. Anecdotally, I can tell you that it appears to take longer and cost more to fix when certain equipment failures occur. Floods can't be good for underground equipment either.

I guess George doesn't care to own his mistake. Oh well.

jorod February 7, 2009 at 6:03 pm

Did KY vote for Obama?

Mezzanine February 8, 2009 at 6:01 am

Actually in a muirduck's perfect world this scenario would not happen because there would be no private businesses to "gouge" anyone. It would all be state-run Soviet style. If you need a generator and can't have one because of Soviet inefficiency, then tough shit. At least the higher-up apparatchiks like George can pat themselves on the back for their superior morality.

Methinks – please weigh in here!

roystgnr February 8, 2009 at 2:16 pm

Selling emergency services at a markup over non-emergency retail? I'm surprised this guy isn't in jail for "price gouging" yet.

Mezzanine February 8, 2009 at 6:02 pm

For pure libertarians, a retailer should be able to sell his merchandise and any price he wishes. However if it's a harsh winter and people would die as a result of such free-market prices, then there is a social cost. One could argue that anti-gouging laws in special circumstances would help prevent worst retributions like total confiscation of private property.

Let's face it, not everyone cares about property rights. If you're poor and starving, free market capitalism is NOT in your immediate interest. This is why socialism always has appeal.

Ike February 8, 2009 at 8:15 pm

"If you're poor and starving, free market capitalism is NOT in your immediate interest. This is why socialism always has appeal."

True, Mezzanine, but let's remember the flip side of that.

Once you get them poor and starving, it's hard to wean them off the State, because your misery is more appealing if it is shared with all your friends.

Mezzanine February 8, 2009 at 10:01 pm

Ike – the reason why we've avoided an all-out socialist revolution with lots of corpses is because of the New Deal which mitigated a lot of rage in the lower classes. However given our current multicultural stew compared to 1933, I'm not sure we're not ripe for a bloody revolution of one kind or another. The minorities are literally at each other's throats in Los Angeles. Blacks vs Mexicans. Whites vs Blacks. On and on, the ethnic wars will explode in riots and looting.

Michael E Sullivan February 9, 2009 at 7:05 pm

this doesn't feel like gouging at all to me (even though I am mostly sympathetic with your general take on "gouging").

He's delivering and setting up these generators. Does that normally happen at retail without a charge? I know when I buy any large appliance, it typically costs another $50-100 on top of the sticker price if I'm not taking my own truck to the warehouse, but instead want it delivered and set up in my home. Seems like that's merely providing a service at pretty close to the non-emergency market rate.

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