Price Gouging Roundup

By On October 30, 2012 · 20 Comments · In Current Events, Exploitation

Any time a natural disaster strikes, you don’t have to wait too long for libertarians to start talking about two things: price gouging and broken windows. Since I’ve written a bit about the former topic, and since, sadly, “Superstorm” Sandy has made it relevant again, I thought I would round up some of the more recent and relevant material on the topic.

For a brief overview of the topic and the basic economic and moral case in defense of “price gouging,” you can watch this video that I made with Learn Liberty:

Obviously, the philosophy and the economics are both more complicated than I’m able to address in a short video like this. So, for those readers willing to dig a bit deeper, I recommend taking a look at my paper, “The Ethics of Price Gouging,” which looks more closely at questions about how gouging ought to be defined, its legal status, and its relation to moral concerns about exploitation. I take up that last issue again, somewhat briefly, in this paper, which responds to a critique of my position by the philosopher Jeremy Snyder.

This video, featuring economist Daniel Smith, discusses some relevant issues regarding the role of economic freedom in Joplin, MO’s recovery:

Finally, for the economists out there, take a look at Tyler Cowen’s recent discussion of some issues relating to price gouging and elasticity of supply. And for frequent and fascinating updates on the topic, be sure to follow Michael Giberson’s treatment of the topic over at Knowledge Problem. His latest post on whether anti-gouging laws are more likely to be applied against “outsiders” raises some especially fruitful questions for future research – listen up, PhD students!

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  • http://www.facebook.com/people/Michael-Giberson/100000176233472 Michael Giberson
  • martinbrock

    Here’s a plug for Russ Roberts. His novel is short, entertaining and instructive.

    http://www.amazon.com/Price-Everything-Parable-Possibility-Prosperity/dp/0691143358?tag=bleedheartlib-20

  • Sean II

    The New Jersey definition of price gouging is, ridiculously enough, anything above 10% of pre-disaster retail. I notice, however, they’ve built in a provision to the effect that price increases higher than 10% are allowable if explained by “legitimate logistical concerns” or higher costs “imposed by suppliers”.

    But do not be suspicious, my friends. This provision is surely NOT designed to exempt Chevron or Con Edison or Walmart from a law that otherwise applies quite forcefully to South Asian convenience store owners.

    In NO WAY is this a law that compels small merchants to acquiesce in the looting of their existing supplies, while creating a totally different standards for big incumbent firms who will play a large role in the aftermath of the disaster. Not at all.

    (On the broken windows front, The Washington Post, NPR, and The Atlantic have all run stories claiming Sandy will have an economic silver lining. One can only assume Krugman’s iMac got soaked, because I haven’t seen anything from him yet.)

    • http://www.facebook.com/people/Michael-Giberson/100000176233472 Michael Giberson

      Usually under the cost-based price increase defense, some costs are more equal than others. If you have an invoice from a supplier (for an arms length deal), then you can pass along those extra costs and usually the state will accept such costs. If you have to pay your employees overtime, on the other hand, or you way to give them hazard pay for being willing to show up at all, you risk having the state Attorney General’s office deeming the connection to sales price as too indirect to justify a price increase.

      • Sean II

        This points up one of the worst kinds of political inequality we’ve created in the corpo state.

        An ordinary small businessman, if he can even spare the time to do this much, will read that law and realize he has no idea what “legitimate logistical concerns” are. Nor will anyone he knows or talks to on a regular basis. Quickly he will figure out that the only truly safe options are to close his shop or to operate it at a loss until his shelves are empty.

        A big firm with its quiver full of accountants and lawyers can look at the same law, under the same circumstances, and confidently plot a profitable course between the (none too solid) rock of the state attorney general and the hard place of forfeited opportunity cost.

        “Too big to fail” is only one side of the cronyist coin. We’re also rapidly moving toward a doctrine of “too small to succeed.”

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  • http://independent.academia.edu/DannyFrederick Danny Frederick

    Nice video, Matt.

  • TracyW

    Stupid question time, is there something unsafe about drinking the tap water in the USA (as opposed to it not tasting that nice), that means that it’s necessary to stock up on bottled water if a disaster is threatening?

    • http://www.sandiego.edu/~mzwolinski Matt Zwolinski

      In general, tap water in the US is perfectly safe. But certain kinds of natural disasters (e.g., earthquakes) can render tap water unsafe by introducing harmful microorganisms into the supply. And in some cases, water lines might be damaged in a way that disrupts service.

      • TracyW

        Thanks for explaining. Earthquakes are a concern in NZ, I keep both bottled tap water (with a bit of bleach) and iodine tablets for sterilising. And if I had advance knowledge of a likely natural disaster, I’d fill up the bath.

        Reminds me I must refresh my emergency bottles.

      • http://www.facebook.com/profile.php?id=833943 Sean Malone

        My only water-related “preparation” in Maryland was to fill up a bunch of 2-liter bottles from my tap before the storm. I don’t really get why people didn’t just all do that.

    • Sean II

      Tracy – Here’s a strange American habit for you: People will come to a seminar or a meeting where bottled water is provided. Two hours later, when the event is over, you’ll see seven or eight of them clustered around a drinking fountain refilling their bottles of Crystal Geyser for the trip home. In non-hurricane times, of course.

      But the same people, if they came to a seminar or a meeting where plastic cups were stacked next to a faucet with a sign saying “help yourself”…they’d be deeply offended.

  • David

    The arguments in favor of free-market price-gouging only makes sense in the case where people have roughly the same amount of resources to spend. In that case, the generator would indeed go to the person who really needs it, the person who is willing to make the deepest sacrifice.

    But in our deeply unequal society where some people have hundreds or thousands of times more resources than others, the generator will go to Paris Hilton to help her style her hair, leaving the poor diabetic kid to die, no matter how desperate the family is. When the rich earn as much in an hour as the poor in a year, the price of the generator would be raised so that it is simply inaccessible to ordinary folks no matter how desperate, while still being quite affordable to the super-rich who wish merely to avoid a minor inconvenience.

    We, as a society, are willing to tolerate this for the distribution of some scarce goods – apartments with views of Central Park, seats at the finest restaurants, access to our political representatives. But there are other goods, necessary goods, which we are not comfortable with reserving for the children of corporate executives, and feel that some portion should reserved for the truly desperate, irrespective of their ability to pay, such as the way that Emergency rooms are required to treat all who come to their door.

    The solution is to replace money with queueing as a way of allocating that resource. Everyone is equal on the queue, the banker and the janitor alike. Only the most desperate will stand on line and pay the cost of queueing, and the generator will go to the person who really does need it the most, irrespective of income.

    Queueing is, of course, horribly inefficient. Where the high cost paid in price-gouging encourages people to import more generators, produce more, and stock up more in anticipation of the emergency, the social cost of queueing is just a deadweight loss. It is just one of the many costs we, as a society, pay for our inequality.

    The solution, if we are forced to keep our unequal society, is the one which we have now. People are allowed to raise prices somewhat, enough to encourage importation and pre-crisis hoarding. But limits are placed on the price-rise of necessary items, even though it causes queueing with all its losses to ensure that some of the items are made available to the desperate middle-class and not just reserved for the super-rich.

  • MARK_D_FRIEDMAN

    Matt,
    Your video is excellent, as is your paper. I think both present a persuasive case for permitting gouging, even if we were to conclude that the merchant is acting immorally. However, your argument is in important part consequentialist, i.e. the benefits produced when higher prices induce a greater supply of badly needed goods. This makes it susceptible to counter-arguments of the sort made by “David,” and one of the problems with conflicts of this sort is that they are very hard to resolve. How do we determine what system will produce the greatest utility in the long run, no restrictions on price increases limited to (say) 50%?

    Thus, I believe that rights-based arguments are much cleaner. The onwer of the generator has the unlimited right to dispose of his property as he likes (subject to the usual caveats about not harming others with it). Price gouging by itself harms no one else, because it leaves them in exactly the same position they would be in if the gouger never existed, i.e. w/o a generator. Case closed, at least for me.

  • Sobpol

    If you decide to pay it is because you are getting more value out of the generator than you do to the 1300 you paid for it

    Wrong, you decide that your child’s insulin supply is of more value than the 1300

    Even though price gouging ultimately puts downward pressure on pricing, nature’s economic solution does not apply in an emergency.

    Immediate need for goods negates the rule of discretionary spending economics. If your argument is valid, why are you not putting forward a 13K price? Does a defined % increase disqualify your immorality position? How ridiculous can the profit be? Or, the conditions of sale? What if the vendor chooses not to sell without a ‘Rumpelstiltskin’ clause? Again, if all parties agreed including the child, is there morality in a private price market?

    The libertarian conviction that emergency price controls prohibit a free market mechanism or the ‘scarcity’ bogeyman is counterfactual to man’s nature. Community spirit and religious organizational relief are more in play during a catastrophe than selfish hoarding – IOW, a generator can refrigerate more than one person’s supply of insulin.

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