Suppose a hurricane hits your town and knocks out power. No power means no refrigeration, and no refrigeration means no ice.

Of course, there’s still some ice left from before the storm, and some of it is in the hands of merchants who are willing to sell it – for a price. Prior to the storm, these merchants were selling ice for $2 a bag. But now they’re asking for $12.

Should the law prevent them from doing this? Should “price gouging” be illegal?

I’ve written on this issue before, and believe that a very strong case can be made that price gouging should not be illegal. But, over and over again, I run into people who reject this conclusion because they believe that price gouging is bad for the poor.

And I can see why someone might think this. If you’ve got a fixed quantity of ice, and you’re trying to decide how to distribute it, dishing it out according to willingness and ability to pay (which is really all that “price gouging” amounts to, stripped of the pejorative language) seems like it’s got to be worse for the poor than just about any alternative method of distribution. Like, for instance, keeping the price constant and distributing on a first-come, first-served basis. If ice goes to whoever can pay the most for it, then the rich will get all the ice and the poor will get none. Right?

Well, no.

First, think about how distributions work outside of disaster economies. Lots of things are distributed on the basis of willingness to pay in the world we live in – hamburgers, cars, baseball tickets. But of course it’s not true that the rich get all the hamburgers and the rest of us get none. That doesn’t surprise anyone, because it’s part of our everyday experience. But suppose that government was in charge of producing all the hamburgers and distributing them equally, and then somebody proposed producing and distributing them according to willingness and ability to pay. I bet a lot of people would have precisely the same worry about hamburgers as they do about disaster goods. But they would be wrong. Is there any reason to think that they’re not wrong about price gouging?

Second, the main reason they’re wrong is that they have a static rather than a dynamic understanding of competition. If the real world really was just like a large number of people competing over a fixed quantity of ice, then there would be some reason to believe that the rich will get what they want and the poor will have to do without (though more on this below). But this is emphatically not what real world markets are like. In the real world, the quantity of ice available for purchase is not fixed. It is a variable. And it is a variable that depends crucially on the profit that sellers expect they will be able to reap from bringing the ice to market. All else being equal, the higher the price, the higher the profit, and the greater the incentive sellers have to bring ice from where they can buy it cheap (say, two towns over where the power is on), to where they can sell it dearly. That means more ice available for those who need it most – including the poor.

Third, allocation according to willingness to pay doesn’t necessarily favor the rich over the poor. It favors those who are willing and able to pay over those who aren’t. The extent to which those latter categories overlap with the former is, I think, an empirical question, that depends on how the prices of goods compare with the absolute budget constraints of the poor (even most fairly poor individuals can afford $12 for a bag of ice, in absolute terms), how elastic demand for the good is, and so on. If the high price of ice dissuades some relatively rich people from buying ice to keep their beer cold, and keeps it available for some relatively poor people to buy for some more vital purpose – say, keeping their diabetic child’s insulin cold – then high prices will have benefitted, not hurt, these particular poor persons.

Fourth and finally, remember what anti-gouging laws do: they bring the coercive force of the law in between two persons who want to engage in a voluntary, informed, exchange. That exchange is one that both of the parties think will make them better off (otherwise, why would they enter into it?), and it is one that doesn’t have any obvious negative external effects on third parties. Even if we grant that, on net, “the poor” as a group would be better off if price gouging was prohibited, some poor people would be made worse off by being prevented from entering into this kind of voluntary exchange (and other poor people will be made worse off by the fact that artificially low prices meant no more goods on the shelf by the time they showed up). What business does the law have using its coercive power this way? You don’t have to be a hard-core libertarian by any stretch of the imagination to think there’s something wrong with using the coercive force of the law to stop people from entering into exchanges that make all involved parties better off – including one party who might be in desperate need of being made better off - and nobody worse off.

Here’s my short video on price gouging from Learn Liberty:

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  • Aeon Skoble

    Spot on!

  • Robert

    Sorry but I’m confused. You start by describing the aftermath of a natural disaster and then go on to ignore the scenario. So you say in a natural disaster supply is fixed, but in the “real world” it isn’t. Both points are true but surely you should focus on one or the other.

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

      Hi Robert,
      I don’t think I said that in the aftermath of a natural disaster supplies are fixed. Maybe in some unusual cases this is true. But in most cases it’s not. If it were fixed, that might partially account for the way most people think about price gouging. But I think this way of thinking involves a serious, but widespread error – ignoring the dynamic character of markets.

      • Lefty

        Yes, let’s say the supply is not fixed and it adjusts depending on demand and prices in the market. Is there any reason to believe that supply won’t be adjusted regardless of whether the price is $800 or $1300 to an extent that it would be profitable anyway? In other words, is there a scenario where a businessman would say “ah, screw that, $300 in profits is not worth to supply the city with my products”, but would immediately change his mind if potential profit becomes $800?

        • Les Kyle Nearhood

          No, not at all. In the aftermath of a disaster, at least some disasters such as hurricanes. It is very difficult to move around. it is difficult to open a retail establishment because usually there is no electrical power. It is hard to find workers because everyone is looking after their own home. In these cases if you want to sell supplies you might actually lose money trying to get them to the people at the normal price.

        • Jameson Graber

          You seem to be assuming that bringing in greater supply from the outside doesn’t involve costs. Let’s say that normally the price would be $800 because the generators are made locally for, say, $500. Now let’s say the disaster hits and the only way to provide enough supply is to bring in generators from the outside, which will cost an additional $500 for each generator. Then selling each generator at $800 would really be an act of charity, but selling at $1300 would be a profitable venture.

          That’s a simplistic example made up on the spot, but something like that is presumably close to reality.

        • Ryan Roland

          But that’s the whole point of the market. While a guy from Virginia may not see $300 as worth the risk and hassle to bring generators to a hurricane zone in Florida, he may feel it is worth it for $800. Meanwhile a guy from Arkansas may feel $300 is sufficient. Different people will draw that line differently.

          But keep in mind that if govt caps the maximum one could sell a generator for, they’ve just created a cap on the amount of resources that will naturally migrate to the zone. The further away, the higher the cost to transport, the lower the profit on a fixed item price. So there will be a distance where it simply won’t be profitable anymore to bring the generator into the area. Thus by capping the possible sell price, they have effectively limited the amount of the resource, whether generator or other, that people would bring into an area to sell.

      • Robert

        Sorry thats how I thought your scenario was working. However, I still think you are mixing two issues. In the aftermath of a disaster the market is not operating properly or efficiently. It isn’t clearing or in equilibrium so normal rules don’t apply.

        In the event of a disaster it is likely that there would be some monopoly or at least actors with strong market power.

        A natural disaster would probably seriously damage roads and transport infrastructure so supply could be fixed or highly inelastic. Also as earthquakes etc are one off or very short events, looking at the dynamic state misses the point. In a few days I will have access to clean water but right now there’s only one guy charging $10 a bottle. Appeal to the long run efficiency is little help here.

        • Bryan C. Winter

          But that difficulty of movement is also part of that cost. If you kept the price the same, then all the water gets bought up and no one would be willing to provide it at that price. Prices go up for a reason. It’s not necessarily malicious, and irrelevant even if it is. Also consider that Merchants in a disaster area are also actually in the disaster area. How much money does it cost them, and how much risk do they assume to be in that area? How much cost is to them to run a generator, or to have supplies sent to them through a disaster area, or how much extra money do they need to pay to the guy selling water, who otherwise might not be so inclined?

          Plus that price signal of super-high prices incentives people to try and compete with the monopoly. So the price advantage of that individual is short lived, and in fact the high prices serve as an important way to redistribute resources better.

          Keep in mind to, those most likely to price gouge will be mostly small operators on the street. They wouldn’t even bother if the price wasn’t high. It will be dudes who drove in with water in their pick up trucks from local towns. So even in the short term price signals matter.

          Also Most large companies like Walmart will often break into their own storehouses and distribute water for free, because they perceive the PR value to be worth more than the quick buck they can turn by gouging. At the very least they won’t raise their prices because something is going on.

          This is the same as a high price for water at a concert. You might say they are gouging you, but factor in the costs for the land, the higher overhead, the fact that this square footage is being used for mercantile instead of feet that are paying bills, and the fact that many shows only profit on concessions ….

          the price of a product is highly dependent on circumstance. In a disaster, you lose economies of scale and production becomes difficult, at least for a short term. a high price for stuff is rational, if a bit morally dubious. Personally If i had water in a disaster, I would give it away, but banning of gouging would just have people hording it instead, and during a disaster, water is actually worth more …. and price is a great way to capture that value to enhance equitable distribution. The important part isn’t the money … it’s the water.

  • shemsky

    Matt, this reminds me of a story I read a long time ago, I think it was from the Little House On The Prairie series. There had been a storm and the people in the small village couldn’t get across a mountain pass to buy supplies for quite some time. Most of the flour in the village was owned by one shop owner, who decided that he was going to start charging many times the usual rate, since the villagers had nowhere else to go. The shop owner knew that charging the villagers such a high price would cause hardship to them, but he was determined to profit from their misfortune anyway. But then he was told by the villagers that they would bear the hardship and pay his price, for now, but come spring time no one would ever do any business with him again. They would have been made him an outcast. So he decided to change his price back to the normal price. That seems to me to be a very good solution to a price gouging problem. A libertarian solution, if you will.

    • Sean II

      LHotP is a much-underused tool of outreach for anarcho-capitalists.

      It’s normal for people to panic a bit when they hear word anarchy in a favorable tone. One thing such people are not expecting to hear next is: “Of course, the model I have in mind is…Walnut Grove.”

      • reason60

        May I suggest Deadwood as a superior model?

        • MARK_D_FRIEDMAN

          Never in human history have so many curse words been spoken in so little time as on that show.

        • Sean II

          I love ‘em both, and frankly, I’m holding out for a crossover series. It will be called “Cocksucker!: Return to the Prairie.”

          Ian McShane will reprise his role as Al Swearengen, with Alec Baldwin as Charles Ingalls, Miley Cyrus as Nellie, Louis C.K. as Jonathan Garvey, Brian Cox as Mr. Olsen, and Shaquille O’Neal as Black Guest Star.

          • MARK_D_FRIEDMAN

            Every other word on Deadwood was extremely foul, but they somehow make a kind of poetry out of it. For a couple of seasons at least it was stellar.

          • Sean II

            The language on Deadwood is never what got to me.

            It was the practice of medicine, made me shudder.

          • MARK_D_FRIEDMAN

            No matter how bad “your” guy was, everyone else was more evil still, so you could root for the depraved and feel no guilt. I thought the first two seasons were great, and then they sort of lost the thread.

          • Sean II

            Came across this quite by chance while wasting time today:

            http://thedroidyourelookingfor.files.wordpress.com/2012/01/deadwoodvenn.jpg

          • MARK_D_FRIEDMAN

            Hahaha…exactly right. Although I think some could enjoy the former w/o the latter, but you would be missing some of its unique style. Thanks.

    • Les Kyle Nearhood

      Since it was a silly TV show they did not show you the real results. The merchant sells at normal prices and the first few families buy up everything, then there is nothing left for the other families. because in the real world when scarce commodities are at controlled prices, people hoard.

      • shemsky

        I didn’t watch the TV show. I read the books, which are based on actual recollections of Laura Ingalls Wilder’s childhood during the late 19th century. Believe whatever you want, Les.

        • mikegiberson

          I’d suggest that the results in a small farming community in late 1800s Minnesota, where most folks know each other personally, would be different from more anonymous interaction in today’s cities. Local market interaction is personal in small towns while mostly impersonal in bigger cities.

      • dalecarville

        You’re acrid and vile. Your mouth is a viper’s nest.

        • Les Kyle Nearhood

          Perhaps you would like to enlighten us on the type of economics you would prefer to see the least harm done to the majority of people in this situation?

          • dalecarville

            Look, I’ve seen you around Taki’s place and I don’t agree that slaughtering the Jews and taking their money is the way to go economically, okay? Lay off now, stormtrooper.

    • mikegiberson

      Here is an excerpt from book 6 in the Little House on the Prairie series:
      http://knowledgeproblem.com/2012/06/05/price-gouging-in-literature-little-house-on-the-prairies-the-long-winter/

      • shemsky

        Thanks for the link, Mike.

  • Sean II

    Matt, please take a tip from my never-ending struggle to understand the anti-market mind:

    Your post is quite elegant in facing the question ‘Does price gouging hurt the poor?” But what if that’s not really the question? Consider three cases:

    1) A individual man makes a 600 percent profit selling ice after a hurricane.
    2) A big company makes an 80% profit selling Plavix to people who have recently suffered heart attacks or stroke.
    3) A small company makes 12% profit lending money to working poor people who use their own future paychecks as collateral.

    Almost all leftists would disapprove of these transactions, along with a number of right-wing populists and regular, apolitical folk.

    It is common for libertarians, bleeding heart and otherwise, to respond to that disapproval by assuming a) it arises from a fear that the poor will be hurt, and b) it will go away once we demonstrate that the poor are in fact being helped.

    And so we have shown this abundantly, perhaps changing quite a few minds on the right and in the center since World War II. Anti-market thinking is not nearly as common today as in the recent past. But the left remains oddly, stubbornly, often maddeningly unmoved.

    What if that’s because they don’t care about the poor? What if the thing they find objectionable is transactions 1), 2), 3) is not a belief that somebody lost, but a knowledge that somebody gained amidst unfortunate circumstances?

    In other words, we tend to assume the left is operating from a consequentialist concern for the poor…but what if they’re really working from a deontological assumption about the duties of the non-poor? What if they believe it’s wrong for an ice vendor, a drug company, or a credit house to make money in a way that has something to do with someone else’s bad luck.

    And finally, what if they are so convinced it’s wrong to profit from disaster that they are willing to hurt the poor simply in order to stop it happening?

    Among other frightening things, that would mean you’re argument here is wasted, and that we really need is to reach our leftist friends is – gasp! – something like what Rand had in mind: a moral defense of profits, from the profiteer’s point of view.

    • Les Kyle Nearhood

      You are asking the questions but I am certain of the answer, at least in the minds of some of the left.

    • Jameson Graber

      “what we really need to reach our leftist friends is – gasp! – something like what Rand had in mind: a moral defense of profits, from the profiteer’s point of view.”

      Or, maybe what we need is simply a defense of consequentialism over and against left-wing deontology. I’m hesitant to say we need to go “full Rand.” Maybe that’s just because I’m not so much a fan of Randianism.

      • I am the Golden God

        I’m not exactly on the left, but I do hate the common right wing conception of desert: that the haves deserve everything they have and the have nots deserve everything they have not, rather than some more plausible combination of luck and desert. So defending Rand, greed, and bootstrapping wouldn’t be the way to go, at least with me.

        While you may think leftists hate profit in itself, and perhaps some do, I think the vast majority have a hard time separating the idea of some people profiting greatly from the idea of others getting fucked.

        I am a consequentialist, so assuming the evidence and argument is strong, I can be convinced of anything on the grounds of utility, especially that of the worst off among us. I would suggest sticking to consequentialist arguments, cause when I hear right wing deontological arguments about desert and coercion, you’ve lost me.

        • Sean II

          “that the haves deserve everything they have and the have nots deserve everything they have not”

          Two things to think about here:

          1) Broadly speaking, the right wing conception of desert has an edge in reality. For although our current mixed system makes it hard to know if the rich deserve what they have, it is generally true that the middle and upper middle classes are full of industrious people who make wise choices, while the chronic “have nots” often turn out to be extremely self-destructive human beings. So…simply as a matter of fact, you must admit there is something to the idea.

          2) Indeed, once we step away from the fallacy-laden realm of politics, I notice that even most left wingers demonstrably share in and live by the right wing conception of desert. Meaning: most of the left wingers I know are hard-working, successful people who dislike, shun, and feel contempt for losers, as long as they know said losers personally. It’s really only abstract poor people who get the benefit of traditional left-wing, luck egalitarian sympathy.

          Thought experiment: imagine you’re an alcoholic with five out-of-wedlock children and no job, living at the mercy of handouts from family and friends. Would it really matter if you were surrounded by Republicans instead of Democrats? I doubt it very much, expect perhaps in the trivial sense that Republicans tend to have more, give more privately, etc.

          So don’t dismiss the idea of desert too easily. One can hold to that idea in a general way, as indeed most people seem to in varying degrees, while at the same time knowing that many of the rich and powerful are shady motherfuckers.

          • I am the Golden God

            “1) Broadly speaking, the right wing conception of desert has an edge in reality.”

            Supposing that well-off people do in fact tend to have certain characteristics like industriousness and not well-off people have characteristics like self-destructiveness, we can’t conclude that these are necessarily deserved. After all, these could be determined by factors entirely out of their control (genetics, socio-economic birth status, etc.). I happen to disagree with hard determinism and think that there is some level of free choice involved, but when making free choices, the available options are determined by things out of our control. So even if I admit that there is something to your idea, I would disagree that this idea is in fact desert or entirely so. I realize that some people think natural talents (rather than developed ones) and genetic characteristics are deserved, but I use desert only in connection to what can be chosen.

            As for your point (2), I must admit I share this attitude sometimes. For example, my brother and I are quite similar intellectually and philosophically, but he fucked around in college and I actually did my work. So now, I’m a graduate student and he’s working a shitty job on campaigns for the Democrats. A part of me feels some sense of desert about these circumstances, yet another part of me wonders how much free choice actually played a role in leading to these circumstances. It’s hard to tell. But I don’t dismiss the idea of desert entirely, I just balance it out with the idea of luck.

    • dalecarville

      What if the greedy are selfish?

      • Les Kyle Nearhood

        What is we all are terribly self absorbed, self righteous, and ignorant of reality?

  • ben

    “the main reason they’re wrong is that they have a static rather than a dynamic understanding of competition”

    Indeed, it’s the classic fallacy of treating systems as static when they are in fact dynamic.

    Almost every policy proposal that socialists and liberals have ever made is guilty of it.

  • Nick

    In a recent conversation I had with a friend at a bar in Santa Monica I described what it was like in Brooklyn in the aftermath of Sandy last year:

    Me: it was very chaotic. Long lines for gas. Because gas stations couldnt charge more people lined up for hours to get the few gallons of gas they were rationed. Often people lined up outside of gas stations with just a rumor that trucks with petrol were coming.

    Friend: Well I am glad the gas companies weren’t able to squeeze more profit out of those poor people. They have suffered enough.

    Me: What? By limiting the amount they can charge the supply of gas was overwhelmed by the demand of it. People waited in lines for HOURS! Black markets were created where gang members paid people to wait in line and those same gang member then RESOLD the gas at much higher prices. By limiting price increases the government made a chaotic situation even worse.

    Friend: What would have been your solution?

    Me: Let them charge what they want?

    Friend: Are you crazy?

    Me: Dude, people were so desperate for gas they would have easily paid double. Why SHOULDN’T THOSE people get first dibs??

    Friend: That isn’t really fair to people who cant afford it.

    Me: You are doing those people no favors. At the lower price, they ain’t getting gas anyways. They are just wasting their time waiting in line. And how do you expect these shortages to fix themselves. If the price is too low why the heck would delivery schedules of new gas prioritize these hard hit areas if the price of gas is almost identical to areas that were also hard hit on the periphery of the city. Why would they venture all the way into Brooklyn if they can just make a nice and simple delivery to Stamford or Tarry town or Yonkers?? You’d better bet those greedy bastards would send loads of extra trucks if they new they might get $8 a gallon!!

    Friend: Never thought of it that way.

    They never do!

    • Robert

      Again we have the problem of supply. In a crisis supply is usually fixed at least for a few days. Hence you can charge as high a price as you can and people have no choice but to buy it. So saying a higher price entices more supply misses the point. The problem is not that the price is too low but that supply cannot reach the market.

      Do you remember the news during Hurricane Sandy or any other disaster? It wasn’t truckers and businessmen rubbing their hands with glee at the profits they’d make? No it was about ordinary people volunteering their time and goods. People were giving things away for free! (Shock horror! Where is the self-interest?) Businesses did everything they could to resupply cities without any additional profit incentive. At the rest of sounding soppy I’d like to introduce a bit of humanity into the debate. People aren’t always motivated by profit, they help disaster victims without the need to exploit them at the same time.

      • Speed

        Robert wrote, “In a crisis supply is usually fixed at least for a few days.”
        In a crisis, supply is limited only by the resources available to create it. When prices rise, supplies don’t run out. New supply comes from entrepreneurs in private vehicles, rented trucks and helicopters. If prices are limited, supply comes from normal channels when they can be put back into service which may take days, weeks or months. Alternatively, they come from the Army/Navy/National guard which means from taxpayers and the budgets of other government programs.

        • Robert

          But if it was possible for other people to bring supplies to the market then price gouging couldn’t happen. In order to price gouge you must have a degree of market power. In order for this, supply must be either fixed or high inelastic. People are trying to resupply disaster zones anyway regardless of prices.

          Let’s say that there is a flood that covers all the roads to a town, preventing all access. Eventually the water will go down, but until then supply is fixed. Lets say the supermarket decides to triple their prices. The citizens of the town panic and resort to buying everything they get their hands on and hoarding it until the crisis is over. So richer families will have enough to last them weeks while poorer families go hungry. I’m know I’m lefty but I have seriously problems with this scenario. do you?

          You argue that higher prices will entice people to resupply the market, but if it is flooded, there is little private citizens can do. The government will be trying to bring supplies as fast as possible regardless of price so trebling the price will have no effect except to make massive profits for the supermarket and create a highly unequal distribution of resources.

          • Bryan C. Winter

            In that scenario it is possible the price would rise high enough to encourage individuals who own private helicopters (very expensive) to move basic materials in at a price. That Helicopter water might only end up being sold at a rate that offers a fair return, but their costs are much much higher.

            Supply of a product is only limited by the resources needed to mobilize whatever resources are required to correct that distribution.

            Now in situations like this, your right, the tax payer steps in and starts dumping massive amounts of water into the area. This is a contract that we have made with our governments, and most people, even libertarians, would agree that short term disaster relief to save lives is good.

            Even in that case, the water would given out for free, and merchants would need to compete with that, in which case the gouging would mostly end.

            I do think much of these objections come down to a moral objection against people profiting from chaos. I think that morally I would have a hard time selling water at inflated prices, but my moral questions have no bearing on the consequences of controlled prices, which have the effect of creating, or at least extending the period of time where there is scarcity.

          • mikegiberson

            Re: “The government will be trying to bring supplies as fast as possible…”

            I guess you’ve forgotten Hurricane Katrina, or maybe Hurricane Katrina did show the government trying to bring supplies as fast as possible. Either way, not an appealing image to survivors in a flood-isolated town.

      • Les Kyle Nearhood

        Humanity is using the most efficient means possible to help others. And the most efficient means ever found is the market.

    • Robert

      Also, one more point. In the story you mention above, the most likely reaction would be panic. The people queuing up don’t know how long they’ll be waiting for normal supplies to return or if they’ll get any more gas again. So they would buy as much as they could and hoard it. So then we have the problem of people hoarding goods while everyone else doesn’t have enough. This is why people introduce rationing. Sometimes the fair option is also the efficient one.

      • Les Kyle Nearhood

        Is it more efficient than letting the market set the price? I have lived through several Hurricanes and my thinking is that rationing is less desirable then just letting the prices rise. And is even worse at combating hoarding. In my experience people get into lines and get whatever is rationed even when they don’t need it, then resell it.

        • Robert

          But if people panic buy, they will buy more than they need or can use. After all people don’t know how long the crisis will last. Also if everyone else is hoarding then it makes sense for you to buy as much as you can before its all gone. At least with rationing everyone has a basic amount and we don’t have extremes.

          It all depends on how you measure efficiency. Is it measured through the price system or through ensuring everyone has enough? Each question has a different answer.

      • Nick

        There would be no hoarding and there would be shorter lines if the price was set correctly. There would also be no black market but maybe it’s better for these poor folks to fill up under the stare of a local gang member and not at a station of a greedy owner.

        Your way creates more chaos. My way effectively rations supplies.

    • Speed

      In this example, if prices float, those willing and able to pay with money will get gasoline. If prices are held at “pre disaster levels” then those willing and able to pay with time will get gasoline. The only difference is the currency.

      • mikegiberson

        No, the “currency” is not the only difference.

        If you pay a supplier with money, the supplier is now funded to secure additional supplies. The more the supplier can be paid, the greater the supplier’s incentive to bring in more supply.

        If you pay by waiting in line, the supplier isn’t similarly aided. You waiting 10 minutes for service provides no added funds to the supplier and essentially no additional incentive than you waiting five times as long.

  • Speed

    From the AP via CBS News (2009)

    “After nearly two years, thousands of truck miles and $12.5 million in storage costs, a cold relic of the flawed Hurricane Katrina relief effort is going down the drain.”
    [ ... ]
    “The Army Corps of Engineers acknowledged after the August 2005 hurricane that it had ordered too much ice because of faulty estimates by local officials. Truckers received up to $900 a day to move the ice to storage sites around the country.”
    http://www.cbsnews.com/2100-201_162-3058982.html

    While no prices were gouged, millions of dollars were spent buying, storing and disposing of ice by the central planning system which outlawed price signals. “Better to have too much than too little,” you say? I respond, “Was there anything more important that the central planning system could have spent that money on? Childhood immunizations? Textbooks? Medical research? Job training? Pay down the national debt?”

    Michael Munger on Ice Price Gouging — No Ice for Raleigh.
    http://www.econlib.org/library/Columns/y2007/Mungergouging.html

  • http://www.anarchocapitalism.us/ Ethan Glover

    The video does an incredible job of explaining this, thanks.

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

      Thank you!

  • Jameson Graber

    I’m ambivalent about the fact that you accept the term “price gouging” in your video and then defend the practice.

  • Jeremy McLellan

    It’s worth noting that the rich aren’t always the price-gougers. Some of the poor would be much better off if they could price-gouge during disasters, since they are the least likely to leave the area. The owners of gas stations and small convenience stores aren’t rich but they are prevented from “price-gouging” their gasoline and food to rich people who would be willing to pay the higher price.

  • reason60

    If the only tool you have is economic analysis, then everything looks like a textbook quiz from Econ 101.
    “As supply drops and demand rises, prices:
    A. Go up;
    B. Go down”

    But of course there are other ways to study the question. Does allowing price gouging advance the goal of binding the community together in unity? Does it respect the value of human dignity?
    The status quo, the society in which we all live, has emphatically rejected the homo economicus model of public policy.

    So if you want to make an argument for price gouging that has value beyond the immediate circle of those who already agree with it, you will have either frame it in terms of the existing framework, or explain why your preferred framework is superior.

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

      I don’t think I would distinguish quite so sharply between economic arguments and the kind of moral considerations you raise. It’s not clear to me, for instance, that preventing two adults from entering into a voluntary, mutually beneficial exchange is a good way of respecting human dignity. Nor is it clear to me why if you care about the dignity or community of disaster victims you would want a policy that makes it less likely that there will be an adequate supply of emergency related goods to meet their needs.

      More generally, when the defining moral feature of a person’s situation is their standing in desperate need of material assistance, then moral considerations about how to go about making sure they get that assistance are going to loom large. And economic analysis, of course, is going to factor quite heavily in such considerations.

      • reason60

        Economic analysis does feature heavily- and to Nicholas below, the long term ramifications of disaster response also should play a leading role.

        Which, unsurprisingly, is why local jurisdictions spend considerable effort and time planning ahead for the what-if scenarios, to avoid on-the-spot pricing.
        For instance, after a disaster, essentials like water, medicine, food and shelter are literally removed from the market- these are usualy made available at taxpayer cost, to anyone who asks.
        The rationale for this is that this is considered to be in the best interests of the community, from a long term standpoint.

        A community that has strong bonds of fellowship and comaraderie, that feels safe and trusting, will be more likely to prosper than one in which everyone feels isolated.

        • Nicholas Geiser

          You’ve created a false dilemma. Permitting buyers and sellers to trade scarce resources after a disaster doesn’t /exclude/ pre-disaster planning. In fact, the two distributional strategies could complement each other nicely. One of the reasons you would want to permit people to buy and sell essential resources after a disaster is to make use of local information and unanticipated developments in supply and demand.

          Someone who opposes “price gouging” is committed to the view that even if a buyer and seller agree to transact for some scarce resource, that particular transaction /cannot/ go through if the price is too high. You could re-describe price gouging several ways–promoting long-term interests of a community or reinforcing norms against exploitation–but you cannot re-describe it in terms that do not include blocking a transaction between consenting parties. Anti-price gouging laws possibly (though not necessarily) reinforce norms or prevent exploitation, but they are necessarily rules that block exchanges even if both parties agree and are made better off.

          • reason60

            I agree and assert that there are occasions when it is perfectly appropriate to block people from conducting transactions.
            But it doesn’t even need to come to that, and in fact rarely does- I am hard pressed to find actual cases of people forcibly being prevented from buying and selling.

            For example, the customary practice is to give away taxpayer provided supplies of essentials, while not preventing someone from buying more if they feel the need and have the ability.

    • Nicholas Geiser

      Why is it rational to judge an anti-price gouging law for its expressive content–some ideal of community or solidarity–rather than its real consequences for people subject to it, including the unintended ones?

  • Theresa Klein

    Somewhat off topic but ….

    I just got back from spending the weekend in a national park. They happened to have a park store, run by the National Park Service, which was selling many useful items such as camping supplies, firewood, as well as beer and wine, and fast food – for a premium.

    I could not fail to note that this government-run store had a monopoly, since obviously private stores can’t operate in national parks, and that they could obviously get away with charging prices like $6 for a hamburger, $4 for a bottle opener, $9 for a six-pack of Corona. Given the likelihood of campers forgetting a few items, they were most likely turning a hefty profit. I noted that bringing in firewood from outside the park or collecting firewood inside the park was also prohibited.

    Price gouging? Not really. Forgetting your can opener isn’t the same as being stuck in a snowstorm, but it is somewhat – ironic – to see the government profiting so heavily off of what is effectively a captive market.

  • good_in_theory

    I don’t think gouging per se gets at the underlying moral concern with disaster pricing, though what I want to argue doesn’t provide a justification for price controls/rationing.

    We can think of the disaster as doing two things: distributing damages (by destroying stuff) and distributing windfall gains (also by destroying stuff, and thus causing an increase in the price of some set of assets). One can anticipate the apologia by which one explains such windfall gains as the product of rational, meritorious speculation on commodity prices/value. And surely some portion of the supply of the relevant disaster goods in a disaster area is there because of such speculation.

    But surely another portion of the distribution of disaster goods is there for purely incidental reasons. Remove or diminish the prospect of disaster, and 70/80/90/ whatever percent of the gas, water, ice &etc there would have been there anyways. Possession of those goods is fortuitious, in the root sense of the word. It’s a matter of luck.

    Therefore, on relatively straight forward luck-egalitrian/quasi-Georgist grounds there is reason to think that much of the windfall received is unearned and unmerited, and that the moral way to distribute shares in those profits is through a basic citizen’s dividend style equal split among the relevant community, as one might do with other ‘found/acquired by chance’ resource endowments.

    That moral argument is compounded by the interaction between the first order effect of the disaster (supply shock: destroying things people need now) and the second order effect (moving left along the demand curve: increasing the price of things people need now).

    To spell it out, being able to profit off the disaster is inversely correlated with having been damaged by the disaster. If your house was destroyed you can’t rent your living room to people with destroyed houses. If your power wasn’t shut off, you can charge people for charging their phones at your outlets.

    So the change in prices occasioned by disasters exacerbates the natural inequity of the disaster, but the windfalls occasioned by those inequities left to be made in trade present us with a potential sort of natural insurance pool through which one could mitigate that inequity, if that pool was captured for the commons.

    Effecting that outcome isn’t well-served by price controls and restricted/banned resale markets. But if there is a practical way to redistribute property rights in disaster goods during the period of disaster, individuals would be able to more equitably benefit from the upside of a disaster.

    So the considered moral concern about disaster pricing seems to me to be about the distribution of unmerited windfalls in the face of, and predominantly at odds with, the distribution of unmerited losses. What’s desired is a way to fairly distribute and mitigate the loss occasioned by disasters which do not equitably impact those affected.

    It may be the case that current disaster policies do more to constrain and destroy windfalls (decreasing the magnitude of the increase in inequality in a pernicious manner) than redistribute them. But that doesn’t mean there isn’t something morally wrong with disaster profiteering:

    It’s unmerited gain occurring as a direct consequence of unmerited misfortune, typically by those who have already profited (relative to the community affected by the disaster) by having been least affected by the disaster- that is, by those who are in a position to be (and perhaps have an ethical duty to be) most open-handed.

    • mikegiberson

      Your point reflects a practice in maritime law, at least as described in Melvin Eisenberg, “The Principle of Unconscionability,” Link: http://escholarship.org/uc/item/77h162nt.

      Eisenberg said, “It is well established in admiralty law that a contract for
      salvage – that is, a contract to rescue a ship that is in distress, or its cargo – is reviewable for fairness.” In the court’s review they distinguish between fortuitous rescue and rescue accomplished by professional salvage operations that have invested and stand prepared to provide such services, and the courts will allow higher rates for professional salvage operations. “Fortuitous rescue” sounds like retailers that happen to have an undamaged supply in a disaster struck area; “Professional salvage operations” would be more akin to a company that undertook exceptional efforts to be supplied before disaster (or become supplied after) in a disaster struck area.

      I’m skeptical that this distinction can be usefully developed into post-disaster pricing policies of the sort discussed in the main post–not every purchasers of gasoline will want to go to court to gain review of a post-disaster gasoline purchase and consumers in general won’t have the information to distinguish between fortuitously-undamaged supply and exceptional-efforts supply. Still, if you want an analogue, there you go.

      (Also note that in practice, price gouging laws as currently designed end up penalizing both fortuitously-undamaged supply and exceptional-efforts supply. See for example People v. Chazy Hardware in which a hardware store sent an employee on a 120-mile round trip in a truck after an ice storm in order to secure additional portable generators for its customers. http://scholar.google.com/scholar_case?case=8925140036455305510 )

      • good_in_theory

        Thanks; that distinction is very apt! I don’t harbor any illusions about current policies, about which I know little – but I suspect they mostly function to prevent increases in inequality at the expense of pareto improving trades which would raise welfare for all involved. I also don’t doubt that practically addressing this question of equitable distribution of rights to fortuitous windfall profits would be difficult and potentially too costly to enact.

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  • planckbrandt

    Willingness to pay, and ability to earn money…money in circulation in your community…the preferences of the money lenders matter here…

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  • http://marconidarwin.myopenid.com/ Marconi

    In the real world, the quantity of ice available for purchase is not fixed. It is a variable.

    In the same real world during a disaster the quantity is not a variable. It is fixed and in short supply. How can you equate the two?

  • Vinnie

    There are so many things wrong with this line of “reasoning” I don’t know where to start! So…..I’ll just SMH and move on.

  • D. Patel

    A lot of waffling going on here, comparing ice to hamburgers and cars as the examples in this article is weak – essentially what may be basic necessities versus luxury items. How is it fair to accept distribution of an essential item, based on a system of cost as opposed to actual needs?
    Following a natural disaster EVERYONE would be willing to pay 6 times the regular price of a bag of ice. It’s very difficult in my mind to accept that it’s ok that all those willing to pay, but lack the ability are just out of luck.
    Price gouging chokes opportunity, and that should be the topic of concern. Rich, poor – aren’t we all supposed to be equal? Our individual financial situations, or lack thereof should not dictate access to the basics (food, water, shelter, health, security).
    Beyond that it’s understandable if, for example, the cost of durable goods varies with demand. A combination of exclusivity and profits can drive those things, without degrading or alienating a group who are constantly in conflict with what they need vs. what the can afford.

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