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.