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Walter Williams on "Price Gouging":

The people's economist, Walter Williams, patiently explains once again why limits on "price gouging" are counterproductive (I noted Georgia's "crackdown" on price gouging a week or two ago):

The fallout from Hurricane Katrina has featured a lot of ignorance and demagoguery about prices. Let's look at some of it. One undeniable fact is that the hurricane disaster changed scarcity conditions. There are fewer stores, fewer units of housing, less gasoline and a shortage of many other goods and services used daily. Rising prices not only manifest these changed scarcity conditions, they help us cope, adjust and get us on the road to recovery.

Here's a which-is-better question for you. Suppose a hotel room rented for $79 a night prior to Hurricane Katrina's devastation. Based on that price, an evacuating family of four might rent two adjoining rooms. When they arrive at the hotel, they find the rooms rent for $200; they decide to make do with one room. In my book, that's wonderful. The family voluntarily opted to make a room available for another family who had to evacuate or whose home was destroyed. Demagogues will call this price-gouging, but I ask you, which is preferable: a room available at $200 or a room unavailable at $79? Rising prices get people to voluntarily economize on goods and services rendered scarcer by the disaster.

He also explains why the cost that the service stations paid when the bought the gasoline is simply irrelevant:

What about the house you might have bought for $50,000 in 1970 that you're selling today? If you charged me $250,000 for it, today's price for its replacement, as opposed to what you paid for it, are you guilty of price-gouging?

Related Posts (on one page):

  1. Walter Williams on "Price Gouging":
  2. Institutions and Katrina:
Anderson (mail) (www):
Okay, but what about the family of four that now can't afford a room, period?
9.16.2005 7:18pm
Steven:
If Dr. Williams tried to sell me gasoline that he bought in 1970, I'd be concerned about more than price gouging.

And with respect to the hotel example, the hosteler could just keep the price the same and self-ration the rooms one to a family in a time of emergency need. Dr. Williams believes that the market is the most effective way to allocate resources. I will agree that it is a way to allocate resources, and in most instances, from a pure economic point of view, may be the most efficient. But economic efficiency may not serve the greater social good in many circumstances.
9.16.2005 7:25pm
Paul Sherman (mail):
Is it reasonable to expect a business to "self-ration" the sale of its product during a period on increased demand?
9.16.2005 7:37pm
Steven:
That nicely frames the whole price gouging issue. Price Gouging is not really an economic question as Dr. Williams demonstrates. It really is a moral question. So to ask whether it is reasonable for a business to self-ration, the answer to me is that it depends on what kind of person you are--in the face of a natural disaster, do yo maximize profit and thereby allow the "market" to regulate who gets shelter, or do you provide shelter at your normal profit margins so that shelter is available to a wider section of the population? I know what I'd do.
9.16.2005 7:51pm
Anderson (mail) (www):
Good one, Steven. The market's allocation of resources is generally better than we can plan ourselves, but it's a system whose values are not the values that most of us profess to share.

So rather than replace the market with a worse system, we tinker with it in the more extreme cases, such as disasters and severe poverty.

Saying that the market's choices must always be honored is like saying that the weather's choices must always be honored, and if it's raining, we should just get wet instead of getting under a roof.
9.16.2005 8:16pm
Stickdude:
do you provide shelter at your normal profit margins

but "normal profit margins" in a time of emergency depends on your suppliers also self-rationing... If you're a gas station owner who keeps prices the same and limits purchases to 10 gallons, but your gasoline supplier raises their prices by 40% instead of self-rationing, you're screwed.
9.16.2005 8:47pm
Luis (mail) (www):
Williams' account seems to conflate "market forces" and immoral price gouging -- in more or less exactly inverse ratio to the conflation behind the media screaming about price gouging.

Not so?
9.16.2005 8:53pm
Stickdude:
so that shelter is available to a wider section of the population

Not really - you've merely changed the criteria that determines who gets a room and doesn't. Instead of money deciding who gets a room, it's now time that decides - if you don't get there before the "No Vacancy" sign goes up, you're out of luck, even if you could have afforded the $200 room.
9.16.2005 8:55pm
Steven:
Stickdude~

Not really. If the supplier's price increases, you can certainly increase your price and maintain your customary margins. It is the situation where the underlying cost doesn't increase or you are selling existing inventory where "price gouging" occurs.
9.16.2005 8:57pm
Wince and Nod (mail) (www):
I'm trying to figure out the moral argument in favor of forcing business people to provide charity, which is what you are arguing for. The advantage of the market is that the business people can figure out what they can afford to provide as charity. If you force them to give a particular price they may be forced to provide no goods or services at all. Governments almost never know what an individual business can afford. Plus, it leads to bad governmental habits.

It's better when governments are more humble and don't try to legislate the sea level.

Yours,
Wince
9.16.2005 8:58pm
Steven:
It's true that there are a finite number of rooms and that if demand exceeds supply, they will all fill up. But in the face of a disaster such as Katrina, "first come, first serve" seems to me an allocation method that is preferable to "the most money wins".
9.16.2005 9:05pm
Steven:
Wince~

I didn't say anything about forcing anyone to do anything. But I'm not sure why you consider it charity to price a good or service at its price as determined in a normal market in the face of a natural disaster that creates a short term aberration in demand or supply? There are valid business reasons to do this, such as creating customer goodwill.
9.16.2005 9:21pm
Tondar (mail) (www):
When did morality become part of economics? In a vacuum of theory letting the market run makes sense. However, when you add irrational panic, the Georgia price controls provided a psychologically calming effect that stabilized the market and lessened the impact of a wider inflationary oil shock. The price controls temporarily tweaked the supply and demand curves of the lifeblood oil market for the benefit of the overall economy.
9.16.2005 9:40pm
Wince and Nod (mail) (www):
Stephen,

If you aren't arguing in favor of price controls and anti-gouging laws, then you must be arguing that businesses should voluntarily keep their prices low. And that's fine. Then the business is providing a good or service at a price lower than it's replacement cost, which is a form of charity. But it's voluntary, which makes all the difference in the world to me.

Yours,
Wince
9.16.2005 9:47pm
Jeremy (mail):
But Steven,

Surely you have to admit that if prices of temporary housing were allowed to rise naturally in response to scarcity conditions following disasters, quantity supplied would increase, since people with houses would begin renting rooms, etc.

Under your rationing idea, there would be no market pressure for increasing quantity of temporary housing supplied. You don't address the possibility of an increase in quantity supplied stimulated by higher prices; that fact dooms your analysis.

I think price controls/rationing is useful only in the situation where the market is malfunctioning due to false information, such as in run conditions due to mostly-false supply problem rumors. Also, abnormally high prices in those situations foment further run problems. That's exactly what happened in Georgia after Katrina, and why I think Georgia's price controls were a reasonable response.
9.16.2005 9:48pm
WishICouldGetLoggedOn:
In a some cases, I would expect that disallowing "price gouging" would substantially reduce the quantity of resources available (at any price).

If I have an independent hardware store in a hurricane prone area, I know that every few years I can sell every generator I have in stock at very high prices - if allowed to. So, I have two options - maintain just enough stock for "normal demand" (perhaps 1 of each of 8 models) OR also keep an extra 15 of the two best selling models in stock. The additional stock of course has a carrying cost for me.

Obviously if I could not charge more in times of a sharp demand spike, the decision is obvious -- don't stock any extra generators because my usual margin will not cover the carrying costs of the extra 30 generators. In this case, I just let my stock run out in the first few hours of the first news reports that suggest that the area will be hit by a big storm. (I could try to ration them responsibly if I was a "good" person, but that is liable to lead to lawsuits because I'm perceived as discriminating against some protected group.)

This leaves two situations. In the first, 8 people have a generator that may not be very important to them (they didn't have to pay any extra for it - maybe they happened to just be driving by my store when they heard the first news report of the storm and thought "hmm..., it would be kinda nice to have a generator). In the second, 38 (8+15*2) have generators and they were the ones who thought it was very important (they were willing to pay a high price - perhaps because they realized that grandma who just moved in needed to keep her medications refrigerated). Indeed, in most cases, I suspect there is little overlap between the group of 8 and the group of 38. I much prefer that 38 needy (in serious need of a generator) people have one than 8 "nice to have to keep the Big Screen running and the beer cold" people have them.
9.16.2005 9:52pm
frankcross (mail):
True price gouging is pretty rare. Prices are set by supply and demand. If prices grow extremely high, that's a shortage of supply vs. demand. If you force prices down, supply will run out entirely. E.g., no gasoline for anyone. This is not necessarily true in the presence of monopolistic power, but how often is that the case?

Now, in some instances, morality might favor some constraints on free market choice. Take the following. There are five rooms available and ten families. If the market allocates, you could have five families with rooms and five families with nowhere to stay. In a case like this, you might override the market and mandate some room sharing for everyone. But . . . (a) cases like this are pretty infrequent and (b) cases like this may be sufficiently complex that the government action will be wrong and worse than the market for even the neediest.
9.16.2005 10:50pm
Perseus (mail):
A "first come, first serve" rule for rationing hotel rooms would seem mainly to favor the swift and the lucky (i.e. those who happen to be close to a hotel) at the expense of the slow (e.g., the old, disabled, and sick) and the unlucky. In any event, it's not self-evident to me that a democratic rule of rationing is preferable to an oligarchic one. Then again, I much prefer Aristotle to Rawls.

Whether being "socially responsible" will buy enough goodwill to offset the opportunity cost of not charging the full market price is an empirical question, but I suspect that it will not be enough, in which case, businesses would be providing charity.
9.16.2005 10:54pm
Chris S. (mail):
If anything, shouldn't the government be driving gas prices up in general? Controlled urban sprawl, lowered emissions through fewer older cars and fewer miles per car (or, minimization of negative externalities, if you like), greater efficiency of use, greater incentive for innovation, potentially increased safety...
9.16.2005 11:29pm
Andy Freeman (mail):
"Excess profits" is what motivates someone to go out of her way to bring in supplies that she won't bring in for her normal markup. Of course, it's not actually "excess profits" - there are extra costs and risks associated with these special deliveries.

If you folks really think that suppliers are making too much money, feel free to do better with your money. You'll do good, you'll make money, and they'll lose. What's the matter? Aren't your principles worth what they'd cost if the money comes out of your pocket?
9.16.2005 11:45pm
gepesh:
Chris S.,

higher gas prices (long term) = more cars with high mpg = less safe cars.
9.16.2005 11:53pm
LisaMarie (mail):
"'first come, first serve' seems to me an allocation method that is preferable to 'the most money wins'". What is the moral basis for one being preferable over the other? As was pointed out, is it always better that a young, mobile person should have shelter instead of an old woman of limited mobility who has money?
9.17.2005 12:17am
Chris S. (mail):
Not necessarily on the whole, gepesh. You're forgetting my "innovation" prong, plus whatever safety benefits having a tight urban center where most cars are high mpg vehicles gets you.
9.17.2005 12:52am
arbitraryaardvark (mail) (www):
Before Katrina, Hawaii had set gas prices at (was it $2.86? Some variation per island.) How's that been working out for them? I haven't seen a news update. Googling, I see gas is 3.58 $/ga. retail, with a state-mandated 50 cent drop in wholesale next week. Still seems like a mess. Apparently the state changes the price week to week, and the gas station owners have to try to guess when to fill their tanks.
9.17.2005 1:49am
speedwell:
It's not the responsibility of businesses to provide for everyone else in the case of emergencies. It's their responsibility to prepare for their on-site employees and infrastructure, and the responsibility of everyone else to individually prepare for themselves, their families, and their homes. If this causes double preparedness, so much the better.

If some people fail to prepare, they'd better just hope people are nice to them. Though that and a dollar will get you a cup of coffee (when there isn't an emergency).
9.17.2005 1:37pm
podraza (mail):
Is it realistic to equate price rationing with "most money wins?" I don't think there was anybody who could afford gas at 2.50 that couldn't afford it at 3.50. Nor would there be many people who couldn't spring for a 300 dollar room if they could rent one at 150. While there might well be an example out there I'm not thinking of, most instances of "price gouging" don't actually leave people with nothing. Rather, they force people to make some tough decisions and cut back on other types of discretionary spending.

And while this isn't really applicable to the hurricane scenario, here is another example of a price gouging perk. When my family went to Blacksburg, VA for my brother's college graduation last spring, my father was shocked and bitter about the high price of hotel rooms. The increased demand for hotel rooms brought on by graduation weekend allowed the innkeepers to gouge. But it is this gouging on graduation (and football) weekends that allow these hotels to be there in the first place. Blacksburg, the rural area that it is, doesn't have a lot of regular demand for hotel rooms. If they weren't allowed to make such huge profits a couple weekends out of the year, they couldn't afford to exist in the first place. Graduation weekend would have been really tough had there not been any hotels at all.
9.17.2005 1:50pm
Shannon Love (mail) (www):
Just a quibble, gas stations set prices based on the replacement cost of the gas they already have in their tanks. Their goal is not to recoup what they already paid for the gas but to make enough money to buy the next gallon of gas. Gas stations may raise prices several times in a day as the futures price for gas rises in the markets. If they did not do so, they would not have the capital to purchase replacement gas at its new higher price. They can only make unusual profits if the price of replacement gas drops suddenly and then only on the last shipment they bought.
9.17.2005 2:37pm
Challenge:
Very few understand that market prices act as rationing systems. In the wake of a disaster like this, demand soars. In order for supply to meet demand, price MUST RISE. Otherwise, a shorter ensues.

This isn't "gouging" this is econ101.
9.17.2005 5:05pm
Leeron:
Perhaps for a C student, it's econ 101. You're creating a tautology - the shortage creates the higher price, and thus the higher prices is necessary to present a shortage.

These types of posts remind me of why I am so unimpressed by lawyers and law professors who pretend to be economists. A lawyer, an engineer and an economist are at the bottom of a very deep hole. The lawyer can't think of a rational way out. The engineer notes that with the coefficient of friction on the sides of the hole, its depth, and the distance between the walls, there's no engineering solution. The economist, though, laughs - "It's easy to get out of here." "Oh?", respond the lawyer and engineer? "Of course it is - you're just not thinking about it the right way," the economist assures them.

"You see, first we assume a ladder...."
9.17.2005 6:14pm
Challenge:
Leeron, maybe you think just throwing in words like "tautology" and acting pompous is good argument, but you're blathernig above accomplishes nothing.

Your response to economic reasoning is, apparently, to assert your faith in vague, meaningless terms like "price gouging."
9.17.2005 7:23pm
Matt22191 (mail):
Leeron,

Regardless of whether or not Challenge is a lawyer or law professor pretending to be an economist, it seems very unlikely that you're an economist. If you were, I doubt you would've misunderstood his argument so badly.
9.17.2005 9:30pm
Challenge:
I feel I should respond in more detail.

There are a number of markets undergoing price increases because of Katrina. One, housing and hotels. Second, gas markets, both regionally and nationwide. Increases in prices in both markets has been called "price gouging," even though the market is just doing what it does best, finding equillibrium and allocating scarce resources.

Whether or not one trusts the market, it is necessary to ration and distribute gas or hotels/housing. Prices determined by a free market, economists think, are the best way to do that. There are other, very cumbserome ways such as coupons and such. However, no such program, even if thought desirable, can be assembled so quickly. One could, in the case of hotels and gas, provide the service at below market levels on a first come first serve basis (classic price control scenario, creating shortages). But this, on its face, is no more equitable than pricing. As a commenter astutely pointed out, "A "first come, first serve" rule for rationing hotel rooms would seem mainly to favor the swift and the lucky (i.e. those who happen to be close to a hotel) at the expense of the slow (e.g., the old, disabled, and sick) and the unlucky."

Further, high prices encourage economizing which other rationing systems cannot. To quote the original post:


Suppose a hotel room rented for $79 a night prior to Hurricane Katrina's devastation. Based on that price, an evacuating family of four might rent two adjoining rooms. When they arrive at the hotel, they find the rooms rent for $200; they decide to make do with one room. In my book, that's wonderful. The family voluntarily opted to make a room available for another family who had to evacuate or whose home was destroyed. Demagogues will call this price-gouging, but I ask you, which is preferable: a room available at $200 or a room unavailable at $79? Rising prices get people to voluntarily economize on goods and services rendered scarcer by the disaster.


I could go on, but I think it is more than clear that most of the criticism here and generally stems not from a reasoned critique of the market but a fundamental misunderstanding of markets and the role of prices in rationing scarce goods.
9.18.2005 4:04am
cathyf:

It is the situation where ... you are selling existing inventory where "price gouging" occurs.

So what do you call it when the price of gasoline goes down by 26 cents/gallon in one day, like in my town last week? Do you go to the station and insist on paying the higher price, since the gas you are buying was delivered last week at the higher price? You don't? For shame! Price gouger!

I have to say that we responded to all of the price signals. Filled up both cars the night before the hurricane, then left them parked and have been riding our bikes everywhere. We used about 4 gallons of gas over 2-1/2 weeks.

cathy :-)
9.18.2005 9:50pm
Paul Gowder (mail):
There's little to add to the economic question, but let me say a couple words on the moral question.

Wince asked for "the moral argument in favor of forcing business people to provide charity." Rather than give him a direct answer, I'd like to suggest that he ask himself the moral argument in favor of forcing business people to pay taxes, especially when they don't get an equivalent amount in return.

The answer, of course, is that we incorporate a principle of distributive judtice, related perhaps to the Rawlsian notions of original position, into our law. It's ok to make a business pay taxes to support the less fortunate because a just society mitigates the risk (which is ex ante shared) of being placed into a less fortunate position through one's own fault.

Thus, we've justified at a minimum taxing business to fund agencies like FEMA to provide relief to the less fortunate. This doesn't get us all the way, of course, because a tax falls on all (subject to level of wealth) while an anti-gouging law falls on those best positioned to gouge, e.g. hotel owners in Houston. This is where economics gets in. Assuming that it is just to force someone in society to aid their fellow citizens, is it less costly to centrally provide that aid, i.e. by putting it into the federal budget and running it through FEMA? I think not, and we've seen why in the last few weeks. It's likely to be less costly to simply force those who already have the needed resource on hand to supply it. Justice can be achieved between taxable populations by subsequent compensation.
9.19.2005 3:22pm
eddie (mail):
The market place is not god or good. It merely defines one sort of game that is played.

Price gouging is not necessarily the only response a market has to scarcity. But a government concerned about the common good can just as efficiently get to the results that you say are preferable, viz. the widest distribution of scarce commodities.

Let us first acknowledge the obvious: The government does not need to protect the holder of the scarce commodity. The fact that the commodoties are scarce insures that the provider will receive just compensation. (But what was the reason to provide such "protection" to the oil industry recently?)

But how does price gouging become productive (except for an unexpected windfall for the holder of the commodity)? This question has not been answered. In fact this question is simply ignored.

And ultimately the immorality of market based capitalism is exposed here: can a society survive if profits are allowed for catastrophies? The assumption that high prices will cut overconsumption is based upon an assumption that all of the consumers are equally capable of paying for the premium. One need only look at SUVs and petroleum consumption to see that the very overconsumers are the ones who can afford to overconsume.

I suppose government (being the inefficient and bumbling entity that it is) should simply stand by and watch the grandeur and efficiency of a free market system that today merely exaggerates the class separation that ultimately will explode on the streets of this country.
9.19.2005 6:45pm
Wince and Nod (mail) (www):
eddie,

You seem to be contending that governments can run businesses effectively and fairly in an emergency. This is odd, because they can't do either effectively or fairly when things are normal. The end result is to punish business owners who are trying to keep their businesses solvent, providing both necessary supplies and necessary jobs.

I've had it with class warriors who blame good business people for all the world's ills. It wasn't business people who killed a 100 million people. It was Communists.

I love big corporations. They've provided me with wonderful products and good jobs over the years. Thank God for GE!

Yours,
Wince
9.19.2005 6:59pm
Bruce Hayden (mail) (www):
eddie said:
Price gouging is not necessarily the only response a market has to scarcity. But a government concerned about the common good can just as efficiently get to the results that you say are preferable, viz. the widest distribution of scarce commodities.

And how is the government going to do that? By fiat? How is the government going to allocate these resouces optimally? Put you in charge? What makes your allocation any better or more valid than mine?

One fault with this sort of socialist allocation is that it is totally subjective. The unstated assumption is that those proposing such will be those in charge of the allocation. But that, of course, is unlikely in the long run.

In any case, we have seen the effects of state directed allocation of resources, and it hasn't been pretty. I think most here would accept by now that those countries that have experimented in this over the last century have failed miserably. Obviously, Russia under the communist system is one of the best examples of this - but pretty much every time a country has adopted state allocation of resources, those resources have ultimately been misallocated, and the countries have fallen significantly behind economically.
Let us first acknowledge the obvious: The government does not need to protect the holder of the scarce commodity. The fact that the commodoties are scarce insures that the provider will receive just compensation. (But what was the reason to provide such "protection" to the oil industry recently?)

Nothing the least bit obvious about this. The natural tendancy on the left is to attempt to reallocate scarce resources in what they consider an optimal manner by fiat. The problem is that this is, by necessity, subjective. And how precisely is the owner of that scarce resource going to be protected? To some extent, the Takings Clause. But that has been pointed out elsewhere to be weak protection.
But how does price gouging become productive (except for an unexpected windfall for the holder of the commodity)? This question has not been answered. In fact this question is simply ignored.

I think that Mr. Williams did a pretty good job of answering this, as have others, who have pointed out that "price gouging" also has the effect of increasing supply - better than any other realistic measure.
And ultimately the immorality of market based capitalism is exposed here: can a society survive if profits are allowed for catastrophies? The assumption that high prices will cut overconsumption is based upon an assumption that all of the consumers are equally capable of paying for the premium. One need only look at SUVs and petroleum consumption to see that the very overconsumers are the ones who can afford to overconsume.

We finally get to your real gripe - capitalism. I suggest that it is similar to democracy - flawed, but better than any other system.

Ultimately, you have to have some mechanism to allocate resources. Absent price, you face either scarcity and/or the use of fiat. The later of course is by its very nature, subjective. Your allocation is surely different than mine. What makes yours better?
I suppose government (being the inefficient and bumbling entity that it is) should simply stand by and watch the grandeur and efficiency of a free market system that today merely exaggerates the class separation that ultimately will explode on the streets of this country.

I remember 35 years ago when a friend of mine kept predicting this sort of revolution. But, it hasn't happened, and it is arguably much further away today than it was then.

Why has your brand of Class Warfare failed to ignite your predicted revolution? I would suggest a couple of things. First, the Ownership Society. And secondly, most Americans still believe that with hard work, they can improve their class standing and economic well being.
9.19.2005 9:11pm
Leeron:
Matt, I'm supposed to be impressed with somebody who tosses out terms like "shorter" and "blathernig", and whose initial response to anyone who dares question his tautology is to post puerile insults, because... because you say I misunderstood his comments about how you have to have prices rise to avoid a "shorter"?

Challenge is anonymously regurgitating comments found all over the Internet, without even the slightest indication of understanding. Color me unimpressed. I never claimed to be an economist; what's your excuse?
9.20.2005 9:08pm
Passing By:
This discussion reminds me of Carlin's joke(?) about the political divide in America, with people on the 'left' putting the rights of people ahead of property, and people on the 'right' putting property rights ahead of people. And yes, as a comment above indicates, a lot of the discussion here (both sides) seems regurgitated and unimpressive.

Bruce, with all due respect to prior arguments that "price gouging" results in reasonable distribution, you are arguing that "price gouging" increases supply? I am not sure what you mean, then, by supply? Do you mean that carpetbaggers come a'runnin', high priced goods in hand, to fill the local need?

If you're talking about something like local hotel rooms following a hurricane, I don't see how local supply will increase as a result of "price gouging" - the effect will presumably be on distribution. If you're talking about something that can be imported quickly in a time of emergency, while I guess it is probably true that people from outside the area will try to take advantage of the opportunity to turn a quick profit, then you're speaking of a shortage that is transitory, and thus the prices should quickly return to something close to normal.

A lot of these economic arguments ultimately seem to turn on a test of faith, at least in the simplistic sort of analysis one sees in the blogosphere. I prefer reason, so this discussion has been a bit disappointing.
9.20.2005 9:22pm
Challenge:
"Challenge is anonymously regurgitating comments found all over the Internet, without even the slightest indication of understanding. Color me unimpressed. I never claimed to be an economist; what's your excuse?"

Oh, nothing I said was original or groundbreaking. But it's not me that lacks understanding of those concepts. If you possessed understanding of these concepts then you could meaningfully criticize them. Your response to the economic reseasoning in the original post and comments was to deny the most basic, tested economic principles as flights of fancy. In place of this reasoning you offer your emotional reaction that "price gouging" is real and economics is totally bogus. Color me unimpressed.
9.23.2005 12:52am