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Where does Capitalism End and Price Gouging Begin?

///Where does Capitalism End and Price Gouging Begin?

Where does Capitalism End and Price Gouging Begin?

Long Island got hit particularly hard during Hurricane/Superstorm Sandy and as such it is the first time in my life that I have witnessed gas shortages.  From accounts that I have read it is a two pronged problem.  One, ports around us and entry ways onto the island have been destroyed, flooded, etc., so the normal amount of gas can’t get here.  Two, a ridiculous amount of gas stations do not have power so the gas that is in the wells is just sitting there. Both of my brothers have waited for hours only to get in sight of the gas station when they were told the station had run out of gas!

What is Price Gouging?

According to Wikipedia, most states (34) have laws enacted against price-gouging which is defined in terms of three elements:

  1. Period of Emergency: The majority of laws apply only to price shifts during a time of disaster.
  2. Necessary items: Most laws apply exclusively to items which are essential to survival.
  3. Price ceilings: Laws limit the maximum price that can be charged for given goods.

A prevalent concern surrounding price gouging is that it exploits consumers. Supporters of anti price gouging laws argue that it is morally wrong for sellers to take advantage of buyer’s vulnerability and increased demand. Buyers are not coerced to take part in this exchange and they voluntarily agree to pay the seller’s asking price. In addition to these mandated laws, many businesses avoid increasing prices after a disaster in order to avoid consumer backlash and stigma.

Price gouging laws seem like the “right” or “just” bill to have on the record but they are obviously opposite of normal supply and demand curves:

The difference between P1 (Price 1) and P2 (Price 2) is an increase in supply and thus a decrease in price.  In the case of gas on Long Island the new supply is MUCH less and thus the price should increase.  While gas has increased it is certainly not a free market increase as evidenced by 3 to 4 hour lines.

It would be interesting if one station that had no line just raised it to $8.00 per gallon.  It would take those that had the drive and means off the line shortening the main normal lines, it would allow those with the desire for gas to fill up at a higher price and the station would receive more profits.

But where does the “utopia” end when every gas station moves to $8.00/gallon and then price gouging is evident?  

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By | 2013-09-26T14:54:15+00:00 November 5th, 2012|Economics|12 Comments

About the Author:

Evan is the owner of My Journey to Millions which was started to track his journey from a broke debt ridden law school graduate to building a positive balance. Need more Evan? Follow him on Twitter, Contact him or get new posts directly to your email

12 Comments

  1. Financial Samurai November 5, 2012 at 12:18 pm - Reply

    Ahh, the chart brings me back to my Economic Major days in college. Love it!

    Glad you guys are alright.

    Honest question from someone sitting in SF, observing what’s going on: Why is there such a large need for gasoline so quickly? I fill up Moose, my car once every 2.5-3 weeks and have candles and matches during the night to see and keep warm in front of a fire. I’d like to think I could easily go for a week without power. Now there are reports that power is going back on within a week.

    What are your thoughts, and why did you guys need ga?

    • Mike Collins November 14, 2012 at 8:29 am - Reply

      I live in NJ and had no power for 12 days, and I saw the insane lines at gas stations too. To answer your question about why everyone was rushing to buy more gas, I think there were a few factors…

      1. Some people didn’t plan ahead and got stuck with an empty tank. No excuse for this really as there was plenty of advance warning and we all had more than enough time to gas up before the storm hit.
      2. The hum of generators was a constant wherever you went. While my family toughed it out in the dark for 5 nights and then crashed with my sister once her power was restored, many people had gas guzzling generators going 24/7 and that created more of a demand for gas.
      3. Only a handful of stations were open. Most had fuel but no power to pump it and those with power quickly ran out as the demand was insatiable.
      4. This biggest factor to me was that people panicked. From what I heard many people on line still had a half to ¾ tank of gas but just wanted to “top it off” out of fear they wouldn’t be able to get any gas when they really did need it.

    • Evan November 14, 2012 at 2:49 pm - Reply

      I think gas lines occurred for 2 reasons: 1) No one wanted to change their lives and 2) FEAR. Fear that the gas wouldn’t be there tomorrow meshed with the fact that people were still driving around like there was no actual gas shortage

  2. Christian L. November 5, 2012 at 12:56 pm - Reply

    Evan,
    If all those gas stations moved to $8 per gallon, I’d imagine that consumers would stop buying at some point. At the very least, few consumers would still be willing to pay that.

    Let’s hope this situation doesn’t get much worse and normalcy returns to the affected areas.

    -Christian L.

    • Jenna November 5, 2012 at 6:53 pm - Reply

      I’m not sure I would agree with that. People who need generators to heat their homes and run sump pumps would pay that much.

      • Evan November 14, 2012 at 2:55 pm - Reply

        Or there could be different gas stations charging different. $8/gallon with no line and less people and $5/gallon with a line that makes it up in volume.

  3. Brandy November 5, 2012 at 8:36 pm - Reply

    I know I am totally in the minority but I think price gauging is good. If you only have x gallons of fuel and you have people who want 800000x gallons, you have to get some of them to not want to buy the gas any more. People say it is taking advantage of the situation, but I don’t believe a first come first serve option is any more fair.

    • Evan November 14, 2012 at 3:01 pm - Reply

      I think people get angry when it is a necessity like gas. If they did it with PlayStations or TVs I don’t think people would get as angry

  4. Thomas S. Moore November 6, 2012 at 8:34 am - Reply

    I understand why there is a storage but I am with Sam in that it seems the people are causing the demand to be so high. I know living in FL that when hurricanes come people are getting so much at once that i leaves others with nothing. Yes I know you want to make sure your family is ok but there are a lot of other families that need gas, water, etc. If everyone is considerate of others it works better. Plus a lot of people can’t even go to work and don’t have fire places. What is the gas going to be used for?

    Hurricanes are serious business and I hope most people never experience them.

    • Evan November 14, 2012 at 3:02 pm - Reply

      I think a lot of it has to do with how prepared your area is for a hurricane. For example, there are cities that get an inch of snow and everything shuts down, where I am you need 6 or 8 inches for things to get serious and upstate NY needs a foot before things get crazy

  5. Glen Craig November 7, 2012 at 7:57 am - Reply

    On the one hand higher prices would remove some of these ridiculous lines (like a mile long, I kid you not). On the other hand there are many folks out there that need the gas for generators.

    The thing with gas is I think a lot of people didn’t come close to expecting the effects of this storm (hell, most people didn’t and we still can’t comprehend the damage). People didn’t fill up before the storm and were left with little after it hit. There’s also a lot of panic causing people to fill up before they need to. But lastly, a LOT of people commute to work in NJ and NY. and I’m not talking about a 15 minute drive either. People drive across Long Island to get to work, and in traffic too. You burn through gas relatively quickly that way.

    I’ve heard that if you can get a rental car (many folks lost their cars in the surge) you won’t even get gas in the car. It’s pretty crazy.

    But the tunnels are opening up and gas has been coming in. Hopefully by the end of this week things will ease up.

    • Evan November 14, 2012 at 3:03 pm - Reply

      I know you wrote this comment a week ago, but I feel like now it is just starting to open up. I think yesterday or Monday was the first day I didn’t see some lines

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