Alex Tabarrok corrects his mother (and other simpleminded folk)
14th September 2008
Many people think that price is determined by historical cost. Price is never, ever, determined by historical cost. Price is determined by supply and demand. If supply or demand change then the price changes regardless of historical cost. Last year’s fashions? The price falls regardless of cost. Chopped up dead sharks? If demand is high, the price is high regardless of historical cost. If the demand for gas were to suddenly fall, the price of gas would fall too, regardless of cost. In the present situation the supply of gas has been reduced and the price has gone up. Historical cost is always irrelevant.
In partcular, price of gas is determined, not by what it actually cost the supplier, but by what it will cost to replace it. There is thus no lag between a rise in the price of oil and a rise in the price of gasoline.
“Price gouging” is merely a tendentious term for “more than I want to pay”. That’s all it is — spin. if you fall for it, then you’re one of the stupid people who would vote for Hitler.
September 14th, 2008 at 07:51
Occasionally, as today, events happen that simultaneously reduce the supply of oil while increasing the need for emergency vehicles. Wouldn’t it be nice if there were a tool we could use to get people to reduce their non-essential driving and leave more gas for the rescue workers?
There is such a tool. It’s called “price gouging”.
I’m for it.