Thursday, September 07, 2006

PRICE GOUGING STILL UNPROVEN

I want to thank Tuaman for his editorial countering my letter where I explained how price gouging doesn't exist other than that done by the government. Although he made a strong case, I wish to test the reality of some his arguments.

Tuaman made the point that family and cultural matters would "force" some people to buy an airline ticket no matter what the price is. He says, "A 'matai' in American Samoa would travel even if airfares persist to be at a family function in the mainland." Tuaman also believes that our soldiers and students from abroad go through similar situations.

But what if the price of an airline ticket was $1 million? It's pretty safe to assume that no matai, student or soldier is going to fly back home at that price no matter what the circumstance. It's also safe to assume to that HAL would want to work that figure down until it started getting some customers.

If HAL worked airfares down to $10 grand, then maybe only the rich may pay to fly. But there are not too many wealthy folks around here, so HAL may get only a few takers, let's say 3 businesspeople and 7 ASG directors, if that. At $10 grand a pop, HAL would only make $100,000. That's still less than what they make at current prices with a full flight of 252 passengers.

Clearly, $10 grand or a million dollars won't maximize HAL profits. If you really think about it, profit maximization drives prices down not up. When someone wants to sell something, no one starts at the bottom. We all want that million dollar figure, but we quickly come to our senses for two reasons: 1) a larger consumer base to spread costs and 2) competition.

Yet cultural, family and career obligations are not the only factors affecting demand. There are millions of reasons ranging from individual incomes to world events that can affect a person's decision to travel. To think that some central authority could analyze all of these factors and set some fair price is stupid. Communism failed because such "intelligent calculations" often lead to gross misallocations shifting resources from one sector of the economy at the expense of another.

In a free market, everyone looks at the market price as a signal to guide their own decision making process. With the market price in mind, people can analyze all of the factors that affect them personally and judge for themselves whether they value buying or supplying that particular good or service more than another. Suppliers will aim for the highest price possible (Togiola calls this "predatory profits") while consumers will aim for lowest price possible (so do we call this "predatory discounts"?).

Nevertheless, it's sad that Tuaman completely ignores the question of property rights as does the Governor and many others. Even if freedom in the marketplace didn't produce the best price possible in an economic (not political) sense, we should still defend HAL prices on the basis that they own their own property. Once HAL falls victim to the force of government, there will be cries for the Governor to lower the price of everything. Some will say that our inter-island airlines gouge their consumers as well and expect Togiola to intervene. Who will be next on his hit list, gas station owners? Retail outlets and Cost-U-Less? Local farmers?

And it's not just businesses' property rights that are under attack. Across America, local governments are using eminent domain to confiscate homes to make way for shopping centers and resorts. If we're not consistent in applying property rights across the board today in American Samoa, what grounds are we going to use when it is businesses who use the government against our own homes? They too will use such excuses as "blight", "economic development", "more jobs" and "more tax revenue" to justify their actions.

How can any one of us expect the full fruits of his labor, invest and expect the highest returns possible or reasonably plan for the future when government has higher claim to what belongs to us?

1 Comments:

At 2:03 AM , Blogger Stuart K. Hayashi said...

Tali, you write, "If we're not consistent in applying property rights across the board today in American Samoa, what grounds are we going to use when it is businesses who use the government against our own homes? They too will use such excuses as 'blight', 'economic development', 'more jobs' and 'more tax revenue' to justify their actions."

The cultural mainstream has a reply to what you said: "So what? If it's for The Public Interest, then we must allow it."

Nobody will take an argument that invokes private property rights seriously unless one can provide a logical, empirical argument that demonstrates both a moral and practical need for private property rights to be recognized in society.

You and I have a strong emotional fear of our homes being seized by eminent domain, but that fear is not shared by as many people as we would hope.

When I told a relative of mine, for example, that it was not plausible to expect that Oahu's rail system could be built without the city resorting to seizing people's land to construct the train depots, that had no effect on my relative at all. In fact, she supported having a rail system even more.

She doesn't care about eminent domain because her neighborhood is not so vulnerable. Her reaction is more normal than either you or I would prefer to admit.

There is, however, somebody who provided that missing piece to the puzzle -- the ultimate defense of private property rights -- far more beautifully than Rothbard, F. A. Hayek, or Milton Friedman ever did.

That person, who provided a better defense of private property rights, is one you will not hear spoken kindly of by economics professors.

That person is Ayn Rand. The answers are in Atlas Shrugged.

I learned much more about economics from that book than I did in any math-heavy economics class.

 

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