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Decision To Fight “Price Gouging” Is A Decision To Prolong Misery 

Jim Prevor’s Perishable Pundit, November 26, 2012

As we get ready for The New York Produce Show and Conference, the City is pretty much back to normal, with the re-opening of the Brooklyn-Battery tunnel.  Though damage remains both to equipment that was below the waterline and beach houses in New Jersey and on Long Island, New York City has moved on, as great cities do, to celebrate the holidays. The tree is up at Rockefeller Center, and will be lit Wednesday.

Sadly, though, the recovery in the region is in spite of, not because of, many government policies.

Virtually as soon as Hurricane Sandy hit, the politicos moved to condemn and sometimes prosecute “profiteering “and “price gouging” as many articles explained. In New York for example:

Hit by a cascade of complaints from consumers, the New York Attorney General’s Office launched a probe on Monday into price gouging in the state in the wake of Hurricane Sandy.

The complaints centered on gas-price hikes but also include reports of jacked-up prices on everything from emergency supplies like generators to higher hotel rates and loftier prices for food and water.

“Our office has zero tolerance for price gouging," NY Attorney General Eric Schneiderman said in a statement. "We are actively investigating hundreds of complaints we've received from consumers of businesses preying on victims of Hurricane Sandy, and will do everything we can to stop unscrupulous individuals from taking advantage of New Yorkers trying to rebuild their lives."

According to state law, merchants are not allowed to take unfair advantage of consumers by selling goods or services for an “unconscionably excessive price” during an “abnormal disruption of the market.” The law doesn’t spell out what constitutes unconscionably excessive, but Schneiderman said a before-and-after price analysis can be used as evidence of price gouging.

The legislation covers vendors, retailers and suppliers like supermarkets, gas stations, delis and taxi drivers.

And the reaction was similar in New Jersey:

We will not hesitate to impose the strictest penalties on profiteers who, in direct violation of our consumer protection laws, seek to capitalize on the misfortune of others in the midst of a crisis and recovery period,” Gov. Chris Christie said, issuing his second warning in as many days on the issue.

This bi-partisan condemnation of “price gouging” may be politically clever, but it is worth noting that it undeniably makes recovery more difficult and more miserable.

Profit opportunities, and high prices, function in three ways to ameliorate a shortage:

First, the opportunity to sell things at high prices motivates people outside the region to move product to the region. In other words, we never had a shortage of gasoline in Florida, but what incentive were they offering people in Pompano to stop selling fruit and work to secure a few truckloads of gasoline and get it up to New Jersey or Long island? If the gasoline has to be sold at normal retail — well, they could do that in Florida. It is the opportunity for a robust profit that motivates people to stop doing what they are doing and divert product to end the shortage.

Second, although many businesses for reputational reasons won’t want to raise prices, having a few independents that will can change the psychology of a situation. Once gas gets short and lines get long, people get petrified and panic at the thought of driving with less than half a tank. They don’t want to run out of gas. So they see a station – the line is “only” two hours — and they say I better top off.  Now if there is an independent in town who charges a crazy price — say $12 gallon, but is never closed, never has a line, etc. — the psychology changes. Now the consequence of not waiting on line is not running out of gas; it is overpaying for a few gallons so you can wait on line elsewhere. The mere availability of a constant supply would make a lot of gas available because people wouldn’t be so hysterical about driving around with an almost full tank.

Third, higher prices lead to less demand. If one needs generators, for example, if the generators are priced normally, one might buy quite a few — say four — to run almost everything in the house. If the price quadruples, one might just buy one to run absolute necessities for the duration of the crisis. This is a good thing because it frees up three generators for other families.

Same thing with hotels. When the Pundit family travels, we usually try and get two connecting rooms for our comfort. But if a room was normally, say $300, and in the crisis they raise the price to $600, we might economize and all share a room. This makes our other room available to another family.

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Combine these three factors together and shortages ameliorate very quickly. So a decision to fight “price gouging” is a decision to prolong misery.

The Pundit Momma used to caution us against “cutting off your nose to spite your face.” Yet this seems to be the approach that politicians believe is going to win the next election for them.

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