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Thursday, September 08, 2005

Price Gouging

Prof. Bainbridge highlights an article in Tech Central Station (by Iain Murray) on price gouging.  Murray writes - with admirably clarity - that price gouging, or short term spikes in prices of essential goods and services caused by supply interruptions during civil emergencies - is (a) good for consumers; (b) good for suppliers; and (c) good for civil order.  Murray's analysis is a straight forward application of old-school neoclassical economics.  For similar arguments, see here, here and here.  Need more?  Go here, here, and here.

Are the twenty-three states that outlaw various forms of price gouging being foolish?  Are such laws relics of a more controlled economy, doomed (like rent control) to unnaturally depress supply and increase price in the long term?  I'm with the states, and against opportunistic price-gougers.

Why?  Two big reasons.

  1. Wealth maximization is a normatively unattractive way to choose one legal rule (permit price gouging) over another (forbid it).  The price gouging articles I've cited, including Murray's, wealth-maximize all the way to the down the line.  With Mike O'Shea, I've written about why wealth maximization has few proponents in the legal academy today, notwithstanding its initial popularity.  No one has disagreed with our analysis.  True, no one has mentioned that exact part of it.  But I choose to believe that it's because we're obviously right.  Nothing about the price gouging debate suggests to me that wealth maximization is a particularly good way to choose between the available legal rules in that context.  The response that legislatures may compensate losers (e.g., poor consumers unable to buy necessary goods) through the tax and transfer system is as weak today as it was when Duncan Kennedy first disposed of it. ("Legislatures never, ever pass statutes that adjust tax and transfer programs to make up for the impact of modifications of private law rules (though of course they could if they wanted to.)")
  2. In civil emergencies, markets don't work to clear information in rational ways. Even high prices will not serve to reduce demand for, say, water and gasoline, over the short term if folks think their lives are going to depend on having such commodities nearby.  Price gouging regulations do two things to reduce panic and regulate demand.  First, they increase trust in market transactions (an SEC-like role) and thus will act to reduce "panic demand" in emergencies without increasing price.  Second, the regulations - when publicized appropriately - have the same information forcing effect as higher prices themselves, teaching people that there are supply interruptions and they should change their use patterns until conditions improve.  In both ways, price gouging regulations use norms and soft-economics to accomplish market stabilization in a more satisfactory way than the market would, if left to its own devices.

I'm sure these arguments have been made in the price gouging debate many times.  But I thought that since Prof. Bainbridge gave his readers one side, I'd give you the other.  Maybe, as Murray suggests, you ought now to be "wary of my motives."  Well, it's true.  I dislike folks who intentionally profit on others' misfortune.  Shame on me.

Posted by Dave Hoffman on September 8, 2005 at 12:30 AM in Current Affairs | Permalink

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» Price Gouging or Market Clearing? from The Debate Link
While quite a few people (including liberal blogger Mark Kleiman have posted defenses of so-called price gouging and noted their opposition to government price caps, Dave Hoffman's argument seems to blow them out of the water. Actually, he makes two ... [Read More]

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Dave Hoffman, who is no stranger to taking on the conventional blog wisdom, turns his sights today to price gouging. [Read More]

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Comments

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I am highly skeptical that people respond to incentives in higher prices in the same way that they would respond to appropriately publicized public service announcements. Now, the extent to which the price system is better than a public service announcement in this regard might be an open question, and perhaps I misread your post to state the latter would be just as effective. Perhaps the AG stating that "we shall enforce our price gouging statutes" will have some impact on the margin. That's fine. But I remain skeptical that this public announcement would be anywhere near as effective as price changes in incentivizing consumer behavior.

I agree this is thought provoking, and a topic that has a lot of people interested right now. In that regard, can you explain what you mean by "price gouging regulations use norms and soft-economics to accomplish market stabilization in a more satisfactory way than the market would, if left to its own devices?" If you are not claiming that the PSAs would work as effectively, what does it mean to accomplish stability in a "more satisfactory" way?

Posted by: Joshua Wright | Sep 8, 2005 7:16:44 PM

What you are leaving out is that nothing you do in this emergency situation with respect to price changes the fundamental condition of scarcity of water and gas. So you are confronted with a problem: given an (insufficient) amount of a commodity, how am I to distribute it? Letting prices rise will prevent some people from getting supplies of that good (and it will be poor people who are screwed), but then they will be forced to look for close substitutes or alternative means to the same end. This effectively increases the amount of gas and water available. If you simply fix prices, people devote their energy to being first in line, but this doesn't actually change anything about the fact that you have a . So the shortage will remain. On net, then, you have less of the good if you fix prices than if you let prices float.

You have a dramatic shortage and you want people's creative energy devoted to finding alternative sources rather than getting in line first.

Posted by: Isaac | Sep 9, 2005 12:51:45 AM

Isaac:

I'm not so convinced that a price controlled shortage leads to no or less of a search for substitutes than a non-price controlled shortage.

Posted by: gr | Sep 9, 2005 9:56:21 AM

How exactly do anti-gouging laws "prevent panic?" For me, and awareness of anti-gouging laws would make me more likely to go fill up my tank today, since I believe there is a greater chance of no gas being available tomorrow. This seems to be exactly the kind of behavior we would want to discourage.

I guess you're asserting that normal people aren't like me. How do you think they react?

Posted by: ed | Sep 9, 2005 6:08:36 PM

Given a catastrophic situation like the hurricanes, the situation is a potentially extended period of short supply. If prices are allowed to rise to a level determined by the market, however high that may be, it will be a matter of days before significant supplies are imported from out of the affected area. The tighter the restriction on prices, the less incentive outside suppliers have to incurr cost and to take goods from their normal, profitable markets to send to other, riskier environments.

The higher prices are allowed to rise, the faster supplies will be replenished and prices will normalize. People, including the poor, may be pinched a bit more in the short run, but that period will be modest if people are allowed to do what is best for them, rather than what a politician thinks is best.

The market is much more responsive than you make it out to be and people are a lot more inventive and self sufficient than you think.

Posted by: Dan McLaughlin | Dec 21, 2005 7:22:03 PM

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