By Antony Davies & James R. Harrigan
When a Muslim extremist took hostages in an Australian café this month, effectively shutting down Sydney's central business district, the ride-sharing company Uber sprang into action by raising its prices? Public disgust, both in Sydney and around the world, was palpable, and Uber backpedaled in the face of “price-gouging” criticism. But it shouldn't have.
Uber has repeatedly taken heat for “surge pricing” — its practice of raising its prices when there is greater demand for its service. But this is what always happens in a free market. Always and everywhere — not only in emergencies — we face the problem of deciding who gets access to limited resources.
No rationing system is perfect but a free-market price is the best solution humans have developed, because a market price does two important things: It encourages consumers to consume scarce resources judiciously by making purchasing more costly and it encourages entrepreneurs to get more resources into consumers' hands by making selling more lucrative.
Read the rest here.
(ht Felix Bronstein)
Great article, thanks.
ReplyDeleteIt never ceases to amaze me how seemingly intelligent people go dirt dumb when it comes to the most basic of economic constructs, that of supply and demand, which is so elementary and elegantly simple that a 5-year old can understand it.
ReplyDeleteI theorize that, aside from the agendas of the myriad special interest groups and their opposition to capitalism, the primary reason for the inability to grasp this simple concept is that people no longer grasp the notion of "scarcity of supply." I'm sure that this is due, in large part, to the fact that the supply of most everything the average person can conceive of needing or even wanting is endless. We are only bounded by the funds necessary to purchase what we desire. Want X? Get on Amazon, punch in your card, and you can have it the next day.
All it takes is a real life example; however, to drive the supply/demand/price relationship home, like a stake to the heart.
I live in Indiana, and like most of the country, last winter was very cold. Much of the state is rural, and uses propane for heating. The demand for propane was up roughly 30% due to the cold. Supply was also down for two primary reasons. First, the summer and fall were unusually wet, necessitating higher than usual propane usage to dry the harvests. This depleted the propane inventories far below normal levels. Second, transportation issues cause the velocity at which propane stock can be replenished to be relatively fixed.
There was a real fear that areas in the state were actually going to run out of propane in the middle of one of the coldest winters on record. Our governor actually relaxed the sleep requirements for truckers so that more propane could be shipped into the state. It was that bad.
I give this as background because the only thing that concerned most people was the price of propane. It is usually around $1.75/gal, but spiked to upwards of $5-$6/gal. I talked to lots of people who did nothing but bitch about the price, convinced that the 'rich' energy companies were just taking advantage of the situation...and these people well and truly believed this.
My response was this:
The rise in price was indicative of the imbalance between supply and demand. Most people who use propane to heat their houses have 1000 gallon tanks. The natural response when running low during an unusually cold winter would be to "fill it to the top". Given the supply issues, there was a real possibility that suppliers would run out, leaving those at the end of the list with nothing to heat their houses. This could be a life threatening situation, especially given the fact that this could affect tens of thousands of people, if not more.
By raising the price, only those who truly needed it would purchase it, and even then one might only fill the tank halfway. In this way the strained supply could be stretched across a wider swath of the population and for a longer period of time.
This doesn't mitigate the fact paying through the nose still bit the big one.
For every single person I talked to, it was as if a light bulb went off. They still thought the high prices sucked, but they all recognized why this had to happen.
The beauty of this mechanism is that it just happens. We don't need the government busybodies trying to micromanage it. In fact, when they do they always screw it up.
Good article until the last paragraph which turns the logic of the article on its head. The paragraph starts: "Would it be nice if people in Sydney volunteered to drive those in need?" and answers yes! The answer should clearly be NO. There is no human way to understand the costs incurred or the incentives driving the volunteers. And how exactly would "those in need" be determined? Volunteers often act in incoherent and chaotic ways which are dysfunctional and even destructive. Not because they are bad people but because they are unable or unwilling to respond to the information embedded in non-coercive price negotiations. In times of emergencies these negotiations are called "price gouging" by the ignorant or the conniving and the authors of this article should know better.
ReplyDeleteRead more: http://triblive.com/opinion/featuredcommentary/7438742-74/price-gas-gouging#ixzz3NVYHdEfR
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