What’s Wrong With Price Gouging?

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A defense of price gouging and a critical response to that piece that were both published in the wake of Hurricane Sandy are relevant again as stories about price gouging emerge in the wake of Hurricane Harvey.

3 responses to “What’s Wrong With Price Gouging?

  1. I think we need more price gouging, especially in disaster scenarios. Two reasons:

    1. High prices cause higher supply. E.g., if the price of generators goes high enough, people from Oklahoma might drive down to Houston to sell their generator — but it would have to be really high to make that happen. Even higher, and people might start driving from Colorado. Etc.

    2. High prices restrict demand to the most valuable uses. For instance, some people want water to drink because they are dying of thirst. Others want it for their thirsty dog. Others want to boil some noodles, take a shower, or wash their clothes. As the price goes up, you stop using water to wash your clothes. Then you stop taking showers. Etc. If the price *doesn’t* go up, then people keep washing their clothes, even when others need the water to survive.

    If you’re in doubt about #1: before you say that everyone should help out of the goodness of their heart, ask yourself if *you* would drive 1,000 miles to sell generators to someone in Houston at cost. (Have you in fact done so? Have you ever done something like that?) How much money would you need to make before you would decide to do it?

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  2. Richard Alonzo Fyfe

    The proposition that “high prices restrict demand to the most valuable uses” is true only to the degree that wealth is equally distributed.

    Actually, I assume that this means that it restricts demand for less valued uses so that the supply remains available for the most-valued uses (which are the uses people are willing to pay for).

    To the degree that wealth is unevenly distributed, to that degree those with wealth can purchase commodities for a less-valued use that those who have a higher-valued use cannot afford to pay.

    Consider: We have a person selling water after a hurricane. She has two customers. Customer 1 wants the water to give to his sick and dehydrated child. Customer 2 wants it to shampoo his dog. Customer 1 has $20. Customer 2 has $10,000. Customer 2 offers $21 for the water.

    To say that the water went to the person who had the higher valued use is to say that Customer 2 valued shampooing his dig more than Customer 1 valued giving water to his sick and dehydrated child.

    We see this where rising income levels increase the consumption of meat, which drives up the price of grain (to feed to the meat-producing animals), which makes it harder for those who cannot afford to buy meat to buy grain-foods to feed themselves and their families.

    We also see it with people buying food crops to convert into renewable energy – ethanol – where it is absurd to say that those who are purchasing ethanol are putting it to a more valued use than those who would have otherwise purchased the grain as food for their family.

    This is not to deny that the market has its uses, or that “price gouging” cannot produce some benefits. However, with wealth inequality, to get the commodity to those with a higher-valued use and less ability to pay, it may be necessary to first take wealth from those who have extra, use it to purchase the high-price commodity (thus giving an incentive to increase the supply of that commodity), and distribute that commodity to those who actually have a higher valued use, even if they cannot afford to pay.

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  3. Restatement: High prices cause most people with low-value uses to economize. In other words, as the price rises, most people think harder about which uses they can do without. Perhaps if there is a millionaire jerk, he will still shampoo his dog. But most people stop shampooing their dog.

    If prices stay fixed at low levels, per government decree, as in the actual situation, then people make a lot less effort to economize.

    The good quickly runs out, both from supply-side and demand-side ‘errors’ (consumers failing to economize, potential suppliers failing to enter the market). Then no dehydrated children get it, rich or poor.

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