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Which is Worse: A Busted Pipeline or a Politician with a Case of the Do-Somethings?

September 22, 2016

Which is Worse: A Busted Pipeline or a Politician with a Case of the Do-Somethings?

gasoline pump

Economists have a grumbling and cynical stereotype. This might be because even the most basic economic principles are ignored by those who should know better and vehemently denied by those who don’t.

Case in point: a restricted supply of gasoline is expected across the Eastern United States because of a busted pipeline, and state governors enact price ceilings to keep the price of gasoline artificially low.

In Alabama, Governor Bentley forbade “unconscionable prices for the sale of any commodity” in his State of Emergency proclamation.

Governor Deal did the same in Georgia. The Georgia Consumer Protection Bureau even has a Price Gouging Form, for citizens to tattle on other citizens for providing a good that is in more limited supply than usual. The website says, “Businesses may not sell motor fuel products, including gasoline, at prices higher than the prices at which those same products were offered before the declaration of the State of Emergency.”

Even first-year economics students know that when the price of a good is set arbitrarily low by government decree, the quantity demanded is greater than the quantity supplied. In other words, a shortage emerges.

The Function of Market Prices

Market prices are the result of an agreement between buyers and sellers of a good. All of the information deemed relevant by those buying and selling is incorporated into their preferences for the good. Sellers want higher prices and buyers want lower prices, but both are constrained. Buyers must outbid other buyers if they want it enough and sellers must underbid other sellers to attract buyers.

If the total stock of some good increases, buyers are only willing to pay lower prices and sellers, too, are willing to accept lower prices. This is because of the law of diminishing marginal utility. Additional units of a good must necessarily go toward the satisfaction of less urgent ends.

…click on the above link to read the rest of the article…

Controlling copper and silver prices

May 12, 2015

Controlling copper and silver prices

There is an unwarranted assumption that market prices are always right, and represent “fair value”. In the case of commodities, particularly metals, this is not necessarily true, because regulated financial markets make it too easy for government agencies and large banks to game the system.

Take the case of a country like China, which is the largest consumer of copper. Does it passively buy its copper through the market? No. Instead it strikes a price with a supplier, such as a Zambian copper mine, based on the London market price, bypassing the market entirely. If China plays no part in setting the reference price in London, the Zambians can be satisfied the price is fair; but if China or her agents suppressed the price of copper in the market before the price is set, the Zambians would be right to be upset.

Now, we do not know if China or her agents drive the copper price down, by placing a relatively small paper order so that the large off-market physical deal is priced favourably, but it is obviously in her interest to do so. Another metal where this could apply is silver.

We need to bear in mind three things about China and silver. She is the world’s largest industrial user, she is almost certainly the world’s largest refiner, and the government owns all the refineries. China imports large quantities of doré 1 and also base metal ores containing silver. So how she goes about this business is highly relevant to the silver price, and the following is an example of how it works.

…click on the above link to read the rest of the article…

 

 

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