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Chris DeMuth Jr. is the founder of Rangeley Capital LLC. Rangeley is an investment firm that focuses on event driven, value-oriented investment opportunities. Rangeley Capital and his value investing forum, Sifting the World (StW), search the world for misplaced bets. Rangeley exploits them for... More
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  • Regulatory Arbitrage And The $250 High Capacity Magazine 3 comments
    Feb 3, 2013 11:24 AM

    Private markets work because individual incentives are tied to the interests of others: people are paid to provide goods and services that others demand at a price that they are willing to pay and they are penalized when they fail to do so. The regulatory state turns all of this on its head: people are paid to do things that we don't want them to do and they are punished for doing things that we want them to. The underlying assumption is quite upside down as well: incentives do not matter. While the market harnesses human nature such as it is, the government's success is predicated upon first defeating human nature and then proceeding with schemes that would only work without people's self-seeking and rational characteristics.

    Confiscatory taxation and welfare are among the most obvious examples of schemes that attempt to punish desirable behavior in order to reward undesirable behavior. However, another example is found in efforts to ban firearms and firearm components. Specifically, efforts are underway to ban the sale of "high capacity magazines". Sen. Dianne Feinstein, a sponsor of this measure, said that, ""it will ban the sale, the transfer, the importation and the possession, not retroactively, but prospectively." The market reaction was quick, but not instantaneous. Days went by with a relatively benign reaction. Some sellers began to ration their products, but others were still doing a brisk but manageable business without price increases. For one example, the above magazine, a 60-round magazine from Surefire, was readily available in bulk for $90.00.

    But within a few days, the combined weight of the state and media began to massively distort the market place. Demand erupted as supply disappeared. Shipments stopped arriving and retailers stopped picking up their phones. Prices rose and then they skyrocketed. By January 14, prices had almost doubled to $179. By the next day, prices had risen to 250% of their cost basis from the beginning of the year. By the 17th, prices had risen to $250. There were approximately 10,000 buyers for each seller. Buyers were willing to pay all expenses and would hound sellers for extra supply. This frenzy was a regulatory arbitrage - a perverse consequence of the regulatory state. As long as human nature remains, the most consistent consequence of regulation will be the creation of such arbitrage: costs will be passed on to consumers, markets will clear, and self-seeking, rational market participants will exploit price distortions for profit.

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Comments (3)
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  • SMaturin
    , contributor
    Comments (2268) | Send Message
    Isn't it funny how the people that are quick to scream "GOUGING!!" and demand government intervention when the rational market participants raise prices during a gasoline shortage, but are completely silent when it is an ammunition and weapons shortage.
    4 Feb 2013, 02:29 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (11482) | Send Message
    Author’s reply » So true.
    4 Feb 2013, 02:31 PM Reply Like
  • Oh Snap!
    , contributor
    Comments (55) | Send Message
    I wrote two replies, but just can't quite nail it. While I of course agree with a free marketplace, there are just so many problems with the wide possession of firearms. It is a very difficult problem, gun violence is claiming many unintended uninvolved hapless individuals. I have friends whose children have been slain over nothing. Its hard not to think easy possession of firearms did not help, although here in West Philadelphia where I live there is a culture of idiocy, I don't know what else to call it.
    'the most obvious examples of schemes that attempt to punish desirable behavior in order to reward undesirable behavior'. Oh, where to begin. I would like to see a better example of Gov't interference in the marketplace. I don't much care for Diane Feinstein, but in her defence, it is a vexing problem.
    3 Mar 2013, 08:58 PM Reply Like
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