Gasoline, ketchup, and spam... Megan McArdle has an article up about how Uber's pricing is really ticking off a bunch of their customers. The high prices during a surge in demand really irritate a lot of people, even though it's easy to show that they shouldn't – at least, they shouldn't on any rational basis. But most people really aren't strictly rational. Actually, they're not even mostly rational. Want proof? Look at the bozos we have collectively elected!
Most of my American readers will be too young to remember Nixon's wage and price controls in the early '70s, and how they affected one's ability to buy gas, but I remember them vividly. First, there was a form of rationing in that you could only buy gas on either odd- or even-numbered days (depending on your license plate number). Second, even on the days when you could buy gas, you had to wait in lines for hours at a time. I once waited 7 hours at a gas station in Long Beach, California, only to be told (when I was just six cars from the pump) that the gas station had run out.
Here's the part that I'm always surprised when people don't get it: those long lines, and the need for rationing, were caused by Nixon's price controls – not in some abstract or obscure way, but very directly (more on that in a minute). Those price controls were a reaction to perceived price gouging. I say “perceived” because actually those increased prices were exactly the right thing to have happen – a free market at its finest. But it really made people angry. Not me ... I got angry at the inevitable results of the price controls.
What people perceive as price gouging is really just prices being raised in response to the old and well-understood principle of free markets: that prices go up when demand exceeds supply (as it did when lower Arabian oil imports meant less crude oil to make gasoline from). In fact, those prices should rise to the point where the demand has been reduced to match the supply. But real people, irrational beings that they are, perceive this as price gouging – and survey after survey at the time showed that people in general (but not me!) preferred the horrible effects of price controls to allowing “gouging”. The price controls meant that whether you got gas on any particular day was sort of a lottery – you might win, and score a tank of gas at a nice, low, price-controlled price. Or, like me on that day when I waited 7 hours and got nothing – you may well just lose. The net effect is that all the gas was distributed, but lots of people didn't get it, and lots of people were really frustrated. If Nixon had left well enough alone, the market would have settled out in short order to some higher price, and anyone who wanted gas bad enough to pay the high price would be able to get it – with no long lines, no gas stations running out, etc. The only rational conclusion to such an exercise is to let the free market work – but I feel certain that even today, people would emotionally react the same way they did with Nixon's price controls: they'd prefer them to the “gouging” of the efficient free market.
I had an interesting experience in the early '90s on a different kind of free market perversion. This was in Estonia, not long after the first McDonald's restaurant opened up in Tallinn. One of my local friends took me there, and for the most part it looked exactly like a McDonald's in the U.S., except that the menu board was in Estonian and Russian, and there were a few locally popular dishes and beverages. One thing, though, was very different – as I discovered when I ordered my quarter pounder with cheese: at the Estonian McDonald's, you paid for the ketchup. The clerk asked me how many packets I wanted, and added it to my bill.
My first reaction was along the lines of: these people are learning the capitalist ropes way too fast! I was definitely taken aback – after having spent a lifetime getting my condiments for free in every fast food joint I'd ever visited, it just felt wrong to have to pay for them. I wasn't angry, though; I was just amused by it. But later, talking with my Estonian colleagues, I discovered there was actually a very good reason for this charge: if the fast food restaurants didn't charge for their ketchup, people would come in with shopping bags and fill them up with all they could carry. Those people would be acting completely rationally – if someone is giving something of value away for free, why on earth wouldn't you go take as much of it as you could. The only reason Americans don't behave that way, I suspect, is that we don't think of a ketchup packet as having a value much above zero. So change the scenario slightly – imagine a gas station was giving gas away for free. Would you fill up your car? I sure would :) By charging a price for the ketchup, the fast food restaurants prevented this run on ketchup; even the Estonian equivalent of a few pennies each was enough to do that.
That reminds me of Bill Gates' proposal to cure the world of email spam: just make emails cost a few cents to send. That would completely disrupt the economics of spam, which depends utterly on it being free to send emails (like the free ketchup!). The spammers can send unlimited numbers of emails for no cost at all. If it cost them (say) one cent to send an email, then sending one million spam emails would cost $10,000 – whereas today it is free. The number of spammers, especially of the most obnoxious kinds, would drop to zero. But very few people like the idea of an email costing anything at all. That's not rational, but there it is...
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