(Churchill must really be rolling over in his grave with that one. My apologies.)
After basically every natural disaster, the tried and true (yet ignored from a policy perspective) articles on price gouging show up. The general theme goes something like this:
People: Price gouging, or sharply raising prices in response to temporary demand increases brought on by a crisis, just exploits consumers and therefore should be illegal. (It is, in fact, illegal in most jurisdictions.)
Economists: Actually, what you are calling price gouging is just the result of regular forces of supply and demand. Prices are generally viewed as an efficient way of rationing or allocating goods and services, and allowing prices to increase would ensure that the gasoline/water (I will stick to those two examples since they seem to give rise to 99.99% of price-gouging articles) gets to the people who value them most. In addition, the higher price could give suppliers an incentive to stay open in crappy conditions and/or get more supply to the areas where it is needed, even if doing so is expensive. If nothing else, it’s important to keep in mind that not everyone can get what they want or need at the lower price.
People: Just because something happens in a free market doesn’t make it fair. You economists are all alike- you just want to see a world where rich people get all of the stuff.
Some Economists (implicitly): Yes, yes we do.
Other Economists: Sigh. Is this any less fair than the stuff going to whoever happens to get in line first?
Other Economists (including yours truly): Hmmm…okay, yes, there is a bit of an issue with the line “gets to the people who value them most” as it relates to efficiency. We acknowledge that value is an intrinsic thing that we are trying to proxy using a a consumer’s willingness to pay (which is of course limited by ability to pay), whereas willingness to pay as a measure of value isn’t necessarily comparable across consumers of different wealth levels.
People: *blank stare*
Other Economists (including yours truly): In other words, Warren Buffett is probably willing to pay more for a gallon of milk than I am, but technically we can’t tell whether Warren Buffett likes or needs milk more than I do or if he just values his money less than I do because he has so much of it.
Smart People: Wait- wouldn’t this imply that high levels of income or wealth inequality undermine the conclusions that economists draw about the efficiency of free markets? (This isn’t a thing quite yet, but it’s been brought up to me at least once.)
The last point made above is a valid one, but casting doubt on the true efficiency of price gouging doesn’t make shortages and people waiting endlessly in line for gasoline/water any more efficient. Therefore, I would like to implore the world to take a slightly more nuanced approach to thoughts on price gouging. Some resources to get you started:
- Econgirl’s handy primer on the economics of price gouging
- A well-reasoned analysis of why price gouging can be productive
Are you convinced yet? Didn’t think so. As a last-ditch effort, I would like to introduce you to a few representative scenarios that arise in the absence of price gouging:
- @ErikaMillerNBR: PHOTO: Gasoline shortages in NYC metro area. 30+ block wait. pic.twitter.com/MkpcHzPy I would like to point out that this is 30 blocks of pedestrians with plastic jugs, not 30 blocks of cars. Regardless, sounds fun! Totally better than paying more, especially when you factor in the excitement that I get from the uncertainly surrounding whether or not gasoline will run out before I get to the front of the line.
- Rationing: Governor Chris Christie recently instituted a policy in some counties that people are only allowed to refuel their vehicles every other day. As someone who fills her as tank about once a month, I can’t help but envision a profitable but inefficient business scenario where I fill my tank every other day and then sell the gas to the people who actually need it to get to work and such. I guess my overall point is that fair/efficient rationing requires a ton of knowledge about the idiosyncratic needs of consumers- needs that are hard to uncover but are conveniently incorporated into consumers’ willingness to pay for goods and services. (On a related note, who needs to fill their cars more than every other day anyway? It seems like the only way this policy would have an impact is if people were seriously hoarding gasoline before the policy took effect.) I think this notion is summed up by a choice quote from the New York Times: ““Everything is flowing now, but you have people coming in with three-quarters of a tank blocking people who really need it,” Mr. Manicchio said. “People aren’t being rational.” Sure they are- they are being rationally self-interested. 🙂
- Jackasses try to cut in line and then pull guns on people when they try to complain. I might get shot, but at least my pocketbook won’t be dead! *rim shot* I would also like to highlight the cost of having police monitor the gas stations because people are upset and increasingly unable to act like reasonable humans. (You may not have gotten gouged on your gas, but you will on your taxes!)
I’d like to think that I’m not totally being unreasonable here, so I will throw the fairness police a bone and suggest that a better policy would involve some sharing of the excess profits between the gas stations and rescue organizations or something like that.
In what might be the ultimate irony, gas prices nationwide have decreased a bit because, you guessed it, demand drops when people’s cars get washed away by a hurricane and aren’t being driven to work.
UPDATE: One thing that is important in this discussion is what value people place on the time that they spend waiting in line. For fast food drive thru lines, at least, this value is $144 per hour. This is an irrational overestimate of course, but it highlights the principle that long lines are, among other things, an implicit form of price increase.