Wednesday, 17 September 2008

Like water for oil, the market always matters

In the wake of Hurricane Ike, commentators once again are complaining about price gouging.  A commenter at the Freakonomics blog makes the perfect point:

May we speak for a minute about Ike's effect on gas prices? Everyone I speak to is irate about the perceived "gouging" and "unfairness" of raising the price of gas to reflect a shortage. I try to tell them I would rather have gas available at $8 a gallon than no gas available at $3.50 a gallon. Then it's my decision how badly I need to make that trip — no to Starbucks, yes to the hospital and so on. Even though they acknowledge the logic, they keep coming back to "but it's not fair."

I have been very interested in the studies showing perceived fairness is an innate need for human interaction. But nobody seems to be talking about the benefits to the public of maintaining SOME availability, even at high cost. Economics loses again.

Notice the difference between what happens with markets and without.  As David Zetland points out (via Paul Walker) we can see the difference starkly in the difference between oil, which even after Ike remains available at a price, and water -- which from Australia to California is in short supply. Why the difference?  Because of the "fundamentally different means and success in coping with 'shortage'.”

    Ironically, we are coping better with scarce oil — nearly 60 percent of which we buy from a broad — than scarce water, which falls from the sky....
    Why such a contrast? Because oil is bought, sold, and marketed as a commodity. Water, in contrast, is treated as a “human right” that should not be allocated by price. Because scarcer oil costs more, quantity demanded falls to equal supply.

Want water?  Pay for it. Want oil?  Pay for it.  I'll let you draw the obvious conclusions about ticket scalping.


  1. richard mcgrath18 Sep 2008, 09:00:00

    Some people just don't get it. On Fox channel last night, commentator Neil Cavuto was quietly trying to explain to blowhard Bill O'Reilly that a percentage change in the price of oil does not cause a similar percentage change in the price of gasoline. O'Reilly was bellowing about oil companies 'gouging' customers, and that the average American wasn't getting a 'fair shake'. Cavuto certainly went up in my estimations, while O'Reilly remains sadly ignorant of capitalist free-market economics.

  2. Isn't "capitalist free-market economics" unnecessarily pleonastic repetition :)


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