Price Gouging
by Peter Dorman (originally published at Econospeak)
Price Gouging
Whenever there’s a natural disaster, a famine or some other such crisis, people zero in on price gouging. Are grain merchants jacking up prices to take advantage of a food shortage? What about airlines raising fares to cash in on desperate attempts to flee an impending hurricane, or stores that double or triple the price on bottled water? And generators that suddenly only the rich can afford?
Most think this type of exploitation is unjust and even wicked, but Econ 101 says the opposite: it’s a rational, socially desirably market response to a change in supply and demand. Higher prices for goods made scarce and valuable by a disaster encourage both more provision and greater care in use, exactly what you would want in such a situation. For details, see the writeup in today’s New York Times.
According to the Times, the main flaw in the free market argument is that it allows the poor to be completely priced out. This is an application of the argument, made by many social theorists, that distinguishes between essential goods, which should be rationed more or less equally among all, and inessentials, which can be left to the market. There’s a lot to be said in its favor, and I won’t dispute it.
But the Times and most commentators miss a second point, which is about the same issue of social utility as the case for markets. Societies depend on a general willingness to share, volunteer and reciprocate, especially in desperate times. When a hurricane or earthquake strikes, or when war or some other spasm of human destructiveness occurs, we depend on friends and strangers to help locate survivors, pick up the rubble, share their homes and meals and generally pitch in. There have been a number of stories, for instance, about ordinary people from other parts of the country who, hearing about Harvey’s devastation of Houston, made their way their to help out however they could. Most of us won’t drop everything and head to Texas, but it’s safe to say that Houston won’t recover, or at least not so much or so quickly, unless hundreds of thousands in Texas and elsewhere lend a hand.
The problem with price gouging is that it undermines the spirit of voluntary provision. Who will make a personal sacrifice to help the community rebuild if those with the most means are using disaster as a golden profit opportunity? Pecuniary incentives crowd out intrinsic ones. This is true at the individual level and also socially. A society in which the market performs rationally but spontaneous cooperation is snuffed out is cold, cruel and ultimately not rational at all.
Disaster relief for sale is not so different from love for sale.
Very like the rest of life.
Those near subsistence are vulnerable to everything, they have to plan and manage 100% efficiently to get by and that may not be enough, those with plenty who also have backup lines behind them ready to extend another hand don’t worry about any of these things. Failure is just a prelude to success. There are essentially no events that would end with Trump Jr. jumping out a 26th story window of Trump Tower, no matter what level of bad decision-making and market catastrophe struck, even criminal acts. These are all things resolved by a simple phone call.
Interestingly the recent events show that a much stronger restraint on price gouging is social media. If someone posts that X is price gouging it is a major threat to the places reputation. (Unless you don’t care what customers think) One thing social media has done is to help the world turn into a village in the sense of gossip and the like. Word of Mouth works again as it did not for a long time in larger cities. Consider the first story about Best Buy and putting a case price on water by taking the cost per bottle times the number of bottles.this went to social media, and the corporate HQ was called and the issue fixed.
A second story before Harvey a reporter tried to check in to a Best Western and was quoted a price 2x what it was set at, the corp HQ was called and the location told the corporate rules (again one bad apple could spoil the entire chains reputation)
My suspicion if you are part of a large chain outfit, if you gouge egregiously the HQ will get involved and it will work to keep the chains reputation.
As an example consider that one oil company told folks with its sign outside that if they put in a higher margin than before over the wholesale price of gas the sign would be gone.
Higher prices are a signal to “send more supply.” Anti price gouging legislation can have a detrimental effect on supply. If you put a cap on prices, what happens is that people may not go the “extra mile” to bring the supply. There’s not enough in it for them. This is the other side of the coin.
“Most think this type of exploitation is unjust and even wicked, but Econ 101 says the opposite”
I think that explains a lot of the problem. Econ 101 seems to be about making moral judgements rather than about the efficient allocation of resources. It’s a religious enterprise, not a scientific one. In fact, as Joan Robinson often noted, it starts with a set of moral judgements, then seeks to develop means of reinforcing the existing social and economic structure.
If economics is just about maximizing profits, why not just threaten to harm people unless they pay protection money? It’s efficient. It’s profitable. It’s probably Pareto optimal. It has all sorts of negative mid-term and long-term side effects, but Econ 101 doesn’t deal with them.
If economics is ever going to get taken seriously as a science we need to stop talking about profitability or efficiency in moral terms. How profitable or efficient is a baby? Econ 101, as it is currently taught, tells us that no one in his or her right mind would ever want a baby. So much for social Darwinism in which babies surviving to reproductive age are the ultimate good.