Re: Supply and Demand Does Not Justify Price Gouging

On 1 Sep 2005 07:30:15 -0700, mapant@xxxxxxxxx wrote:

>I'm sick of people saying "supply and demand" is justification for
>gouging at the pump. Too many idiots are saying "well, the demand for
>oil is high so that's why gas prices are high".

Supply is also restricted. Both conditions must be in place.

>A product's price should not significantly exceed the expense of
>producing it and bringing it to the market.

It is not actually the "product" that is getting expensive. It's the
unproduced natural resource, the oil in the ground. Oil sellers have
to pay more economic rent for access to that resource.

>The price of gas has almost
>doubled over the past year or so, but the cost to pump oil out of the
>ground, refine it, and bring it to the market has remained the same.

No, the royalty cost (economic rent) to pump it out of the ground has
in many cases risen greatly.

>Bush and other world leaders need to do something to bring the cost of
>oil in line with its true cost to produce.

Well, what has Bush done about bringing the cost of residential land
in line with its true cost to produce (i.e., $0)?

>This situation proves what I've always known: price setting by supply
>and demand is a flawed system; price gouging is price gouging
>regardless of supply and demand; and economists are really alot dumber
>than people think.

Actually, it's people who are a lot dumber than economists think.

>In healthy free markets, prices should be close to the cost to produce
>a product;

Think: land costs nothing at all to produce, yet it commands enormous
prices. Why? Likewise, no one produced the oil in the ground, yet it
is rapidly becoming more and more valuable. The concept of economic
rent is necesary to any understanding of these phenomena.

>the system is broken when prices are double the cost to
>produce it.

Depends what you mean by "produce." The folks who extract, refine and
sell oil have to pay more and more for the oil in the ground, which no
one produced, and which got there at zero cost. The economic rent
they pay for access to that resource is part of their cost of
production.

-- Roy L
.

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