Friday, April 04, 2003

Price Gouging

I’ve been meaning to write something about so-called “price gouging” in the gasoline industry, but now Jerry Taylor has beaten me to it. It just goes to show that if you procrastinate long enough, someone will do the job for you.

Jerry makes the point well, so I only have one point to add. Part of the increase in gasoline prices is attributable to the *anticipation* of higher prices in the future, when supply may be lower or demand higher. The expectation of higher future prices induces some consumers to stock up at today’s lower price, and it induces some sellers to hold back sales for tomorrow’s higher price. In short, consumers shift some of their demand from future to present, while suppliers shift some of their supply from present to future, which causes an increase in today’s price and a reduction in tomorrow’s (likely) price. The overall result is a dampening of price fluctuations, as well as better allocation of gasoline over present and future consumption.

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