Government Response to Scarcity: Make it Free

So, someone decided to make gas free in areas affected by the big northeastern storm, but needless to say, they ran out.  Connecticut, New Jersey, and New Yorkers can report price gouging at telephone numbers and websites. Chris Cristie, recently honored by Cato, is pursuing these cases as well.

Arbitrageurs are the criminals in this drama. This is bad because people should be able to pursue their own advantage openly, frankly and honestly, as opposed to poseurs, those doing good by spending other people’s money on other people, usually only temporarily because it’s hard to sustain.

Now, why would this instinct against arbitrageurs be so common? Consider the case where someone is offering a high price because they are taking advantage of the customer’s ignorance, not because supplies are tight and the new equilibrium price is higher. That’s the intuitive feel of gouging, that the bad price isn’t an emergent phenomenon, but a personal one. The solution is to promote competition via entry, which exist mainly in the form of safety and fairness regulations. A system to prevent gouging might lower the prevalence gouging, but still not be as good as one where people would occasionally be gouged, but competition and high prices would allocate resources more efficiently, and the higher prices would increase supplies from less urgent uses and areas.

The same could be said for all sorts of financial regulations. They only help the Goldman’s of the world.

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About Eric Falkenstein 136 Articles

Eric Falkenstein is an economist who specializes in quantitative issues in finance: risk management, long/short equity investing, default modeling, etc.

Eric received his Ph.D. in Economics from Northwestern University , 1994 and his B.A. in Economics from Washington University in St. Louis, 1987

He is the author of the 2009 book Finding Alpha.

Visit: Eric Falkenstein's Website

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