Archive for September, 2010

Who’s Afraid of the Big Bad Price Gouger?

Until I started reading Micheal Giberson’s posts on price gouging, I had not given the subject of price gouging much thought.

The main question of debate is “Is it moral for a retailer to charge more for a product when demand surges due to outside circumstances?” A classic example is charging for snow shovels in a snowstorm. In a recent post, Micheal poses the question:


Consider two hardware stores: one prices snow shovels at $15 when there is no snow and at $20 when there is snow; the other maintains a fixed price for snow shovels under both no-snow and snow conditions. In equilibrium, the second store will carry a smaller inventory than the first and offer it a price between $15 and $20. Which pricing policy is more moral?

I have to say that I don’t have a ready answer. I’m tempted to think that both store owners are acting morally, and that morality rests not with the store owner, but with the snow shovel customer.

If the customer plans ahead and receives the low “no snowstorm” price, there is no reason to complain. After all, who ever complains about a sale?

If the customer does not plan ahead, and is forced to buy the $20 shovel from the first store because the second store has run out, whose fault is it? I place the fault squarely on the customer who did not plan ahead for a snowstorm, and if that customer subsequently complains about price gouging, that complaint seems immoral in my eyes.

I think it’s everyone’s right to not plan for disaster if the consequences fall only on themselves. But if they then complain because they are being taken advantage of in the vulnerable position they’ve put themselves in, I have no sympathy. Buyer morality grid

Put simply, the store owners are planning for the snowstorm, and willing to accept the consequences of their actions. Buyers may or may not plan ahead, but it’s only when they are not willing to accept the consequences of their actions that I consider them immoral.

The only circumstance in which I’d place any moral onus on the store owner is when the disaster could not be foreseen. In this case, neither store owner will have snow shovels on hand because there will have been no market for snow shovels before the storm, so the whole question is moot anyway.

On the other hand, if the disaster can be be foreseen, but the consequences of not planning fall on society as a whole, then those who oppose preparing for the disaster are immoral because they are forcing others to share in the consequences of their decision.

If you read this blog regularly, you can probably figure out which coming disaster I have in mind. Are you advocating preparation, or opposing it?

Comments off

When it Makes Sense to Worry About Jevons Paradox, and When it Doesn’t

Why High MPG Cars May be a Problem, But Efficient Lighting Isn’t

Tom Konrad, Ph.D.

Jevons Paradox: is the proposition that technological progress that increases the efficiency with which a resource is used tends to increase (rather than decrease) the rate of consumption of that resource.

-Wikipedia

Recently The Economist reported on research that concluded “making lighting more efficient could increase energy use, not decrease it.” Micheal Giberson at Knowledge Problem thought this was worth commenting on as an example of Jevons Paradox. I’m here to tell you that before we get worried about more efficient lighting, we should keep in mind when Jevons Paradox applies and when it does not.

Jevons’ Paradox is a consequence of the downward slope of the demand curve: when the price of something falls, we tend to demand more of it. The slope of the demand curve is also known as the elasticity of demand. A gently sloped demand curve (where consumption increases rapidly with decreasing price) is said to be "elastic," while a steeply sloping demand curve (where consumption increases only slowly with decreasing price) is said to be inelastic.

I recently wrote about some research showing that the elasticity of the demand for driving has increased in recent years. That means that the effect of Jevons Paradox is becoming more significant when it comes to driving: increases in automobile efficiency that decrease the cost of driving will have the effect of increasing driving more than they would have in the past, meaning that we should not count on increases in CAFE standards (which increase the efficiency of automobiles) to do much to reduce gasoline usage. Instead, we should focus on structural changes that reduce driving by increasing its marginal cost or decrease the marginal cost of alternative modes, such as mass transit.

Micheal Giberson’s note prompted me to look at the paper on which the Economist article was based. I found that the researchers assumed that the demand elasticity for light had not changed over the last 160 years, and would not change in the future. I find this assumption highly questionable, given that the structure of the lighting market has changed greatly as technology changed from candlelight to gas light to electric light.

When candles were the primary light source, acquiring light required a lot more effort than just flipping on a light switch, and it was possible to see the light you purchased being used up as a candle burned down. Today, we would have to go outside our house (at night) and watch the meter spin to see visual evidence of the cost of light, and even then it would be difficult if not impossible to isolate the effect of the cost of light from the cost of watching TV or running our refrigerator.

Because it’s much harder today for a consumer to determine the true cost of the light he is using, I expect that consumers will be much less sensitive to changes in the price of light than they were in the past. In other words, contrary to the assumptions in the paper, demand for light has most likely become much more inelastic in recent years, and so we should not expect that increases in lighting efficiency (and the associated decreases in lighting cost) will have much effect on total light consumption.

Comments (15)

Follow

Get every new post delivered to your Inbox.

Join 152 other followers