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In Defense of Price Gouging:

As Todd notes, the state of Florida is stepping up its misguided efforts to combat "price-gouging" in anticipation of Tropical Storm Fay. Unfortunately, this issue tends to come up anytime there is a hurricane or other natural disaster.

I was going to write a post about how harmful anti-price gouging laws are and why they actually end up exacerbating the shortages of scarce goods that they seek to alleviate. But economist Glen Whitman said all that needs to be said in this excellent 2003 post, written on the occasion of a previous Florida hurricane:

[H]igher prices induce suppliers to bring more of the scarce good -- generators, batteries, flashlights, etc. -- to market. Tyler [Cowen] responds by pointing out that, in the short run, the supply is fixed -- but then he immediately offers the obvious counterpoint, which is that "in the long run the economy will stand readier with emergency flashlights." Exactly so, and this seems to me a decisive argument. In order to stock generators and such, shop owners have to take up valuable shelf space that could have been used for other items. The added profit they can reap during times of crisis is the financial reward that compensates them for making sacrifices during ordinary periods. A policy that clamps down on "gouging" during a crisis makes it less likely that necessary items will be available during the next crisis. Also, . . . the higher prices attract suppliers in non-crisis regions to transport their goods to the region where they're needed most.

I hope that lawmakers and voters will come to understand these realities, and repeal anti-price gouging laws before the next big natural disaster occurs. But I'm not optimistic about it.

Related Posts (on one page):

  1. In Defense of Price Gouging:
  2. Gasoline "Price-Gouging":
TomH (mail):
Greed is is only acceptable if cloaked in altruism.
8.19.2008 5:07pm
Ryan Waxx (mail):

Greed is is only acceptable if cloaked in altruism.


You mean like CEO's and board members of "green" companies lobbying for green pork?
8.19.2008 5:23pm
Shelby (mail):
It seems to me there may be a limited case for anti-gouging laws in situations where there's a natural monopoly -- for example, in a remote town that's too small to support more than one gas station. I'm still skeptical, but I'd like to see what people here have to say about it.
8.19.2008 5:36pm
Arkady:

[H]igher prices induce suppliers to bring more of the scarce good -- generators, batteries, flashlights food stocks, water, ice, medicine, etc. -- to market. Tyler [Cowen] responds by pointing out that, in the short run, the supply is fixed -- but then he immediately offers the obvious counterpoint, which is that "in the long run the economy will stand readier with emergency flashlights food stocks, water, ice, medicine, etc.."


Of course, in the short run, the price-gouger rational marketeer will probably get the crap kicked out of him in the ensuing riot.
8.19.2008 5:40pm
Sarcastro (www):

A policy that clamps down on "gouging" during a crisis makes it less likely that necessary items will be available during the next crisis.


I mean, if you're going to run out of an item anyway, might as well make sure that only the most wealthy people get it. The market favors its chosen!
8.19.2008 5:41pm
J. F. Thomas (mail):
In order to stock generators and such, shop owners have to take up valuable shelf space that could have been used for other items.

Good thing you are a law professor and not a retailer. Nobody is going to stock anything on the 1% chance (which is about the highest risk of a hurricane hitting a particular spot along the Gulf or Atlantic coasts) that they will be able to jack up prices for a day or two a year.
8.19.2008 5:44pm
roy (mail) (www):
Sarcastro --

Is it better that 8 poor people get something vital, or that 10 wealthy people do?
8.19.2008 5:50pm
J. F. Thomas (mail):
The Wednesday after Katrina (which as you recall struck on Monday), the Sam's Club in Baton Rouge received three tractor trailers full of generators which they sold at regular retail. They were literally selling them out of the back of the trucks. Louisiana's anti-gouging laws did not prevent them from keeping generators in stock and reacting quickly to the market. By Wednesday, in Baton Rouge, which still had power out in some areas, gasoline was readily available even though the population had more than doubled over night.
8.19.2008 5:59pm
gasman (mail):

Good thing you are a law professor and not a retailer. Nobody is going to stock anything on the 1% chance (which is about the highest risk of a hurricane hitting a particular spot along the Gulf or Atlantic coasts) that they will be able to jack up prices for a day or two a year.

Tropical storms, hurricanes, floods, and like disasters are slow onset, and retailers, especially those with large store networks like the Lowes, have the option and ability to acquire additional stock on short notice. But bringing in the goods has a cost, and there is no guarantee of a sale (the disaster doesn't happen), or that they won't be flooded with returns (people return what they bought when danger passes). So the cost of making goods available can be a substantial gamble. Cap their gains enough and the cost of the wager won't be a sufficient reward. While the sellers will have done a reasonable a priori analysis of the minimum threshold price to ensure a return on the wager, it is doubtful that a legislator would be able to assign a proper price bump for each possible item.
If the government wants to 'protect' us from price gouging, then it can do so not by controlling free market prices, but by having a functional FEMA flood the market with sufficient quality necessities in a timely manner.
You can wait for salvation from FEMA. I'll pay now for that which I didn't pay previously.
8.19.2008 6:01pm
gasman (mail):
Part II. Why I expect to pay more for goods in a crisis.

I need to manage my 'inventory' of urgently needed items in my home. I don't know which items will be most needed, have finite space to store them, some items require ongoing maintenance (generators), perishable items, foodstuffs, and batteries require stock rotation. Further, I might find myself away from my home at the time of crisis, or my home might have been destroyed. For these reasons I maintain a stock of something more fungible called money. Whatever I need during a crisis will cost more than it will today. However I have saved the opportunity cost of that money (earning interest or dividends) and avoided loss through wasted stock items lying about my home. Thus, the fact that I have planned to go to the 'gouging' market is completely rational. I hope that someone will be there with goods to sell whenever and wherever needed.
8.19.2008 6:07pm
Sarcastro (www):
roy in times of crisis, rich people don't have any additional resources to help themselves!

Society helping the poor in a crisis is an idea for idiots who don't understand about The Market and the virtues of self-interest.
8.19.2008 6:11pm
J. F. Thomas (mail):
Thus, the fact that I have planned to go to the 'gouging' market is completely rational. I hope that someone will be there with goods to sell whenever and wherever needed.

I honestly hope you don't live in a hurricane zone with this attitude, because you are an idiot. You will find your money is no good as the necessities you need will not be available at any price. Hope is not a plan--even if you have available cash. You better have enough food, water, and necessities to survive for a week if you plan to stay put in a hurricane zone or even return immediately after the storm.
8.19.2008 6:15pm
Guest 2L:
Glad to see that I'm not the only one J.F. Thomas has called an idiot. Name calling is a nice capper to the I've-evacuated-from-a-hurricane-and-you-haven't argument he uses to establish his expertise on all possible aspects of price-gouging laws.
8.19.2008 6:22pm
one of many:
JFThmas, and you seem to be making the mistake of thinking that the only time generators (or other 'emergency" sup[plies) are sold is during time of crisis. Generators are a slow selling item and usually custom ordered (you think your hospital has an off the shelf 30MW generator?) however there is a small but significant market for them, the opportunely to make a large profit rarely can be the deciding factor in whether or not to stock them. The question is not "do you stock something which you only have a 1% chance of selling" but "do you stock a slow moving and bulky item which has a 1% of being super-profitable". I don't know about Florida, I haven't lived there in decades, but in the NE the answer was "yes we'll stock generators which we've never stocked before on the chance of being able to reap big profits" after a few extensive ice-storm caused power outages in the 1990s.
8.19.2008 6:30pm
BGates:
He's not an expert on price-gouging because he's evacuated from a hurricane. He's an expert because he's a statist, and if power were properly centralized, experts like him would be in charge.
8.19.2008 6:30pm
J. F. Thomas (mail):
Glad to see that I'm not the only one J.F. Thomas has called an idiot. Name calling is a nice capper to the I've-evacuated-from-a-hurricane-and-you-haven't argument he uses to establish his expertise on all possible aspects of price-gouging laws.

I get really annoyed when a bunch of law professors and students who have never experienced a hurricane evacuation use ivory tower economic theories and impractical ideas (I've got plenty of money, I'll just buy everything I need after the storm--no matter that there is no power, no water, no stores open, nobody selling anything).

Try living in the real world for awhile. You obviously don't know what the hell you are talking about or what conditions are like immediately before and after a hurricane.
8.19.2008 6:33pm
Ron Hardin (mail) (www):
The definitite Munger podcast on price gouging off this page

Almost all of the Munger podcasts are entertaining.
8.19.2008 6:34pm
Sarcastro (www):
J. F. Thomas has owned you all. One cannot talk about the economics of hurricanes unless one experiences one!

Just like one cannot talk about war policy without being a soldier!
8.19.2008 6:38pm
Guest 2L:
BGates:

Actually, I think J.F.Thomas has some interesting and relevant examples from his interesting and relevant experience. It's genuinely too bad that he isn't engaging in the argument in a more useful way. I am glad that experts like him aren't in charge, though.
8.19.2008 6:39pm
J. F. Thomas (mail):
JFThmas, and you seem to be making the mistake of thinking that the only time generators (or other 'emergency" sup[plies) are sold is during time of crisis.

I am not making that mistake--and of course large fixed generators are not going to be sold as an emergency supply regardless. Ilya argued that stores will not have excess stocks of these items if the potential to price gouge during a storm event is not there. This of course is nonsense. No single store is going to stock based on a 1% chance that they will be able to double the price of a portable generator for one or two days a year. They are going to keep the generators in a central warehouse and ship them to the storm zone after it hits. It will probably hit somewhere within a reasonable time period and you don't have to charge exorbitant prices to justify the warehousing costs of the excess stock. That is the advantage of having big retailers like WalMart and a good transportation system.
8.19.2008 6:40pm
J. F. Thomas (mail):
One cannot talk about the economics of hurricanes unless one experiences one!

I know you are being sarcastic, but it would be nice if the libertarians here would at least base their arguments for price gouging on actual conditions during a hurricane, not on what they imagine it to be like. Like they might acknowledge that no matter how much a gas station could charge for gas, it can't pump gas if it doesn't have power and all its employees have evacuated.
8.19.2008 6:46pm
Guest 2L:
J.F.Thomas:

I agree that the ivory-tower theories are often ridiculous from the perspective of the real world. Ideally, lofty academic ideas are tested against the real world, and it seems great that you're saying that they don't jibe with your experience. Too bad you can't say it in a less caustic way. I'm not convinced by Ilya Somin et al. because they're professors, and I'm not convinced by you because of your personal experience. Ideally, the argument would progress beyond that sort of thing.
8.19.2008 6:51pm
PatHMV (mail) (www):
Having also lived through Hurricane Katrina (I was lucky, my power was only about for about 4 days), let me jump in a bit and attack price gouging. Charging more for an item because of increased demand in the middle of an emergency is not "price gouging." The statute may be vaguer than academics would like, but real price gouging occurs when the merchant triples or quadruples (or more!) the price of an item not to find a way to ration the goods, not to balance supply and demand, but simply because they CAN. A price gouger charges $10 for a gallon of water even where there's only one person needing the water... because there's no other source of water available to the person needing it at that moment.

Ordinary folks generally know the difference between somebody legitimately charging more (did they boat the water in after the emergency at great risk and expense) and somebody taking advantage of them (selling their ordinary, regular stock at triple prices, just because nobody can currently travel over to the next town due to the flooding). I can't think of a single case of prosecuted price gouging which involved the defendant presenting any real defense of advanced planning and higher stocking costs of items with only (to steal the example) a one percent chance of ever being sold.

Despite the "vagueness" of the Louisiana price-gouging law, in fact (as J.F. Thomas has pointed out), a great many businesses did indeed do yeoman's work in stocking our grocery stores, gas stations, and Walmarts after the hurricane, and they did so when the actual level of demand was almost impossible to evaluate. The statute didn't seem to actually deter them, and I doubt very much that they operated at a significant loss... and any loss they suffered by charging less than the market would absolutely bear was probably due not so much to fears of prosecution under the gouging law but to a desire to reap good publicity by helping people in need.
8.19.2008 7:14pm
Joe Bingham (mail):
Pat, I think you're confused. You write,

A price gouger charges $10 for a gallon of water even where there's only one person needing the water... because there's no other source of water available to the person needing it at that moment.

But just before that, you write,

Charging more for an item because of increased demand in the middle of an emergency is not "price gouging."

So charging more because of increased demand isn't gouging, but charging more because of decreased supply is? Besides, if the water's only available from one person, that's probably because there's a supply shortage because prices were sticky and didn't respond to increased demand quickly enough (there's no other reason why everyone else would be out of water...).

JF Thomas writes,

[after a hurricane] You will find your money is no good as the necessities you need will not be available at any price.

That's because people are afraid to raise prices to market rates.

To those arguing with JF Thomas, search for Steven Landsburg's posts here, where JF Thomas argued with the good professor extensively, with every argument implying that people do not, in general, respond to incentives. Thomas continues to argue this based on his personal experience. If you believe people tend to respond to incentives, you're living in a different world from him, and there's no point. He's a troll.
8.19.2008 7:23pm
Elliot123 (mail):
"I know you are being sarcastic, but it would be nice if the libertarians here would at least base their arguments for price gouging on actual conditions during a hurricane, not on what they imagine it to be like."

What intrepid folks! Going out in 110 mph winds to buy suppilies. Glad we have those grizzled veterans of Mother Nature's wrath to preach to the rest of us. I Suppose the weenies bought their stuff before the hurricane hit. And the slackers probably bought stuff after it hit. But hats off to the ones who brave the elements to get flashlights and beef jerky. The rest of us can only stand in awe of their mighty deeds! Gee whiz, real Katrina vets!

Does this mean only crooks or gunshot victims can speak about gun laws?
8.19.2008 7:24pm
Guest 2L:
PatHMV:

That sounds convincing to me. In the thread to the earlier price-gouging post, I tried to argue that emergencies could increase market power of retailers because of increased search costs and switching costs. The increased market power could increase prices in ways that have nothing to do with market clearing. It seems to me that the question is whether the necessarily vague anti-gouging laws do more harm than good. I don't think theory alone provides the answer.
8.19.2008 7:26pm
Joe Bingham (mail):
A related phenomenon is that of anti-scalping laws. It is supremely irritating that I have to pay a premium for tickets to sold-out shows because I have to buy them on a needless black market.

(My guess is that these laws are probably the result of rent-seeking by the music industry, which prefers to have at its shows the demographics that are willing to wait in long lines, but not willing to pay higher prices--usually teens).
8.19.2008 7:33pm
Joe Bingham (mail):
Now that I think about it, I probably owe Landsburg credit for the theory that the music industry prefers to have teens at its shows, and that's why it under-prices tickets. (He suggests that teens are more likely to purchase merchandise or popularize the band, I think. It's been 10 years since I read that book.)
8.19.2008 7:34pm
PatHMV (mail) (www):
I would point out that none of the blog posts cited thus far rely on any empirical evidence, other than the anecdotal "hmm, I wonder if there's a connection" between the price-gouging law and lack of availability of gas supplies in the run-up to Fay striking Florida.

And gas is a particularly poor subject for the hypothetical arguments. Only a relatively small amount of gas is stored at individual gas stations. Let's say that there's a 5% chance in any given year that demand for gas will triple (300%) for a one-week period in all of Florida (keeping in mind that rarely is the entire state evacuated or hit with the full strength of a hurricane). To prepare for this one-week tripling of demand, gas retailers would have to triple (let's say for the sake of argument) their underground storage tank requirements, triple their amount of inventory (on which they no doubt pay property or inventory tax), etc. And they'd have to repay all of the cost of that by jacking prices sky high on average once every 20 years. It makes no economic sense to do that. It makes FAR more sense to do it the way it is actually done, which is to have the gas wholesaler increase deliveries to the station in the run-up to the evacuation, or in the aftermath. The wholesalers, being regional or national, can cope with that by simply temporarily diverting a small portion of shipments elsewhere to the affected area, with little significant impact on the non-affected areas.

Consider another, similar example... phone lines. On Mother's Day, and in other times of crisis, the phone lines reach or exceed the limits of capacity for the number of simultaneous phone conversations which can be had. Even if individuals were willing to pay a HEFTY premium for a guaranteed connection in a time of crisis, it wouldn't make any economic sense for the phone companies to build the system so it could literally handle every single person in the country (or any given region of it) to be on the phone at the same time (this all applies much more to the older switched phone system and not the more modern computerized system which doesn't have the same kind of limits). Even at price-gouging prices, they wouldn't recoup their investment in infrastructure.

Similarly, to prevent the current run-outs of gasoline, each individual gas station would have to massively increase the size of their underground storage tanks. If the problem could be solved simply by more deliveries, well, there's no law prohibiting them from charging more based on their supplier charging more for the increased delivery fees. The problem might be solved by creating some kind of portable set-up, tanker trucks which could actually retail gasoline, allowing dozens of new gas stations to be immediately opened in the crisis area. That, too, is not foreclosed by the price gouging law, because those clearly would charge more for gas because they are providing a new and different service.
8.19.2008 7:35pm
byomtov (mail):
.It is supremely irritating that I have to pay a premium for tickets to sold-out shows because I have to buy them on a needless black market.

You don't have to. Skip the show.
8.19.2008 7:40pm
titus32:
Yeah, Joe -- my memory of the details is imperfect, but I recall that in another series of comments to an economic post, J.F. essentially argued that producing something at a lower cost is not efficient. At least he's now making an empirical (if merely anecdotal) argument.
8.19.2008 7:43pm
Joe Bingham (mail):
You don't have to. Skip the show.

Unfortunately, in the few cases where anti-scalping laws are successfully enforced, many people are forced to do just that.
8.19.2008 7:45pm
Cornellian (mail):
I wonder how they draw the line between "sell at a high price = legal" versus "sell at a high price = illegal price gouging." One would think that would be a difficult line to draw.
8.19.2008 7:48pm
Joe Bingham (mail):
Similarly, to prevent the current run-outs of gasoline, each individual gas station would have to massively increase the size of their underground storage tanks.

Pat, I think you're confusing two different ways in which anti-gouging laws can be harmful. One way is by creating less incentive to stock goods for which demand will rise in the case of a hurricane. A different way is by causing goods to run out in the event of a disaster because they're under-priced.

The original post mentions the first argument. That argument, as you correctly point out, does not really apply to gasoline.

However, anti-gouging laws could still be responsible for gas shortages in Florida because they encourage retailers to price their gas low enough to encourage over-consumption. If they were allowed to raise their prices, that would encourage people to buy less gas (say, half-fill my tank so I can get up to New Port Richey, instead of filling it so I don't have to stop for gas again this week).

So no, anti-gouging laws probably didn't cause gas retailers to store less gas than was needed to deal with the crisis. If there's a shortage, though, that's a good indicator that the price was too low to allocate the gas efficiently--and that could be the result of fear of anti-gouging crackdowns.
8.19.2008 7:50pm
Guest 2L:
PatHMV:

I think we are realistically talking about extra deliveries rather than extra storage. But it's not clear to me that a law would necessarily allow retailers to pass on additional costs to their customers without risk of prosecution. If it's a matter of passing along additional wholesale prices to the customer, then you'd maybe be covered, but would the wholesaler be at risk? Somewhere there are going to be costs that are hard to demonstrate to a jury. Are you calling in a favor with your wholesaler to get an extra shipment at the set price? Are you calling in favors with your employees to stay open in the first place? Are you risking broken windows by not boarding them up? Are you postponing your own evacuation to stay open? I agree in theory that you could distinguish between increased marginal costs to meet demand and increased prices due to market power, but can the law effectively distinguish between the two?
8.19.2008 7:50pm
Joe Bingham (mail):
Put another way, there are two incentives offered by high prices in a disaster area: an incentive to limit consumption, and an incentive to supply the good. It's the first incentive, probably, that is the relevant one for the gas shortages to which you refer here in Florida. (I didn't realize there had been shortages, but I haven't been paying much attention.)
8.19.2008 7:52pm
Cactus Jack:

I would point out that none of the blog posts cited thus far rely on any empirical evidence, other than the anecdotal "hmm, I wonder if there's a connection" between the price-gouging law and lack of availability of gas supplies in the run-up to Fay striking Florida.

Fair point. I'd go one more step and speculate that supplier pricing of critical goods in an emergency is not strongly influenced by anti-gouging laws. I suspect that many suppliers don't know anti-gouging laws exist or how such laws function. Rather, suppliers choose not to engage in gouging either for the reason that Arkady cites or for moral reasons.
8.19.2008 7:58pm
Joe Bingham (mail):
(Sorry Pat, now I see the other thread about shortages.)
8.19.2008 7:58pm
J. F. Thomas (mail):
[after a hurricane] You will find your money is no good as the necessities you need will not be available at any price.

That's because people are afraid to raise prices to market rates.


You're not paying attention. It is because there is no power, nobody to man the cash registers, and nobody to deliver the goods because the roads are blocked with debris or flooded.
8.19.2008 7:59pm
PatHMV (mail) (www):
Guest 2L.... that's the difference between the theoretical implications of the law and the practical. In theory, yes. In practice, that has not, in my experience, been a substantial limiting factor. The reality is that no prosecutor is going to bring a charge for modest price increases... we certainly had plenty of modest price increases (especially in the real estate market!) in the aftermath of Katrina and no prosecutions. In the real world, while there may well be isolated problems with over-zealous prosecutors, there haven't been any systemic problems.

Joe, I understand your point, but I don't think it applies much, either. How high would prices have to rise before a father decides to risk his family's ability to get out of town ahead of the hurricane by only buying half a tank of gas instead of a full tank? Look at the miserably failed attempts to evacuate Houston before Hurricane Rita (a month after Katrina, for those of you who didn't live through both). People with full tanks were running out of the gas on the road because of the massive traffic jams. Prices would have to rise very high indeed to deter people from purchasing every drop of gas they possibly can hold. I'm not talking about doubling or tripling, I'm talking about ten-fold or higher increases in cost. I just don't see that happening.

Plus, I think this is an area where having a law on the books helps maintain public order in many ways. If there were no law, and people perceived price-gouging going on (it was an epithet even before it was against the law), then there would be a high risk of mob action. But with the law in place, there's a more-or-less agreed upon definition, and an established process for dealing with same. Prosecutors can respond to calls and complaints with concrete promises of investigations and taking "appropriate" action, rather than further aggravate the public by saying "there's nothing I can do."
8.19.2008 8:10pm
Joe Bingham (mail):
It is because there is no power, nobody to man the cash registers, and nobody to deliver the goods because the roads are blocked with debris or flooded.

That depends on where you are. But in mandatory evacuation areas where it's difficult but not physically impossible to supply gas, people would do it for the right price. For $50/hour, you'll find plenty of people who'll risk their lives, and if the price were allowed to rise enough, stations would generate their own electricity. It's not true that all roads everywhere are blocked or flooded after a hurricane, or that there are no affected areas in which a person could physically survive and sell necessities.

You didn't say, in your post "after a hurricane, if you're in an area that is flooded to the point where vehicles cannot drive and no employee could have survived, you will not be able to purchase necessities at any price." Sure, if you're in a place where everyone is dead, there won't be anyone to sell you anything. I'll give you that.
8.19.2008 8:11pm
armchairpunter:
J.F. Thomas is daft to suppose (1) there are no libertarians or classical liberals living in hurricane prone areas and (2) that it matters one bit to this argument. I have earned a law degree, studied economics and lived through a number of hurricanes. All of this confers on me no special insight as to the matter at hand. Leave off the appeals to "authority" already and try engaging in some real debate. (Next JF will be telling me and all those moral philosophers in their ivory towers that we have no business debating the death penalty, not having not been murdered, committed murder or experienced the death penalty.)

I have experienced first-hand the hurricane-induced scarcity of a number of essentials and not so essentials. Oddly enough, those which remained scarce the longest were those (such as power and water) offered only by governmentally sanctioned monopolists. I have yet to hear a compelling argument in favor of government price controls in the face of natural disaster or other circumstances. I have heard a bunch of ants bitching about the grasshopper.

I have driven past pick up trucks with out-of-state plates hawking plywood for $40 a sheet. While I was fortunate not to need (or to perceive my need for) plywood at the time, I marveled at the phenomenon of arbitrage. Those guys could have been sitting at home in Iowa or some other place far from the eye of the storm drinking beer instead of investing their money in plywood and gas and risking their necks to meet a need. One wonders if those who would wish to see them imprisoned (and their plywood impounded) for refusing to sell their plywood for less than $40 would have them jailed for refusing to sell the plywood at any price.

During an ice storm, I have witnessed my neighborhood grocer mark up the price of a smallish ham by 200%. I decided I could live w/o the ham. I also decided that I would not patronize his store in the future when I could sensibly avoid it. Spot markets do not necessarily eliminate other long term market concerns. Gouging may, in some cases, be bad for business. It may be unneighborly. Neither or these dynamics makes it the proper subject of government intervention.
8.19.2008 8:15pm
Guest 2L:
PatHMV:

I don't disagree with your larger point. But the "modest price increases" criterion might not always work. Take an emergency where the increased marginal cost of supplying demand is really, really high. Those would be legitimate to pass on (from an efficiency standpoint and probably from whatever moral standpoint) but they're still not moderate. Maybe a bright-line rule where you could increase prices by 30% but not 31% might work pretty well, but it's still open to empirical debate. Again, I don't think the theory provides the answer.
8.19.2008 8:20pm
Dunstan:
You're not paying attention. It is because there is no power, nobody to man the cash registers, and nobody to deliver the goods because the roads are blocked with debris or flooded.


Then price gouging laws are redundant, because nothing ever gets sold at any price during disasters in your world.

So you agree with us "ivory tower" types that price gouging laws don't accomplish any good.
8.19.2008 8:24pm
Joe Bingham (mail):
Dang, I never thought of my $600-a-month Tampa apartment as an ivory tower. I guess I'm luckier than I thought.

Maybe my 61st and Woodlawn Chicago apartment will fit my ivory-tower image a little bit better. It's dangerously close to the real world, though...
8.19.2008 8:30pm
PatHMV (mail) (www):
Also, Guest 2L, the merchants who choose to stay open and provide reasonably-prices supplies gain a substantial amount of good will from the community. Sharing the risks of staying in town, delaying boarding up the windows, etc., with the rest of the community tends to be repaid with repeat business AFTER the crisis has passed.
8.19.2008 8:33pm
byomtov (mail):
Unfortunately, in the few cases where anti-scalping laws are successfully enforced, many people are forced to do just that.

A tragic loss.
8.19.2008 9:02pm
Guest 2L:
PatHMV:

Fair enough. I'm sure good will is a factor in the real world. Still there's no theoretical way of demonstrating that the desire for good will would outweigh other factors. The theory isn't conclusive.
8.19.2008 9:03pm
Joe Bingham (mail):
A tragic loss.

Brilliant sarcasm, sucky ability to empathize.
8.19.2008 9:04pm
Joe Bingham (mail):
Also, as PatHMV lays it out, to the extent it's actually a factor, goodwill is a market mechanism.
8.19.2008 9:13pm
armchairpunter:
I do not suppose that, each time I pull up to the pump, I am purchasing both a commodity and a futures contract.

When the hurricane hits, maybe it turns out that motorists have underpaid during all those non-hurricane periods.
8.19.2008 9:13pm
Guest 2L:
PatHMV:

Also, the desire for good will doesn't necessarily cut to the favor of efficiency. It could be that markets would clear at $6.00/gallon, but retailers would rather price at $4.50 and just run out because they figure they'd lose good will by pricing at the more efficient higher price.
8.19.2008 9:25pm
TDPerkins (mail):

In order to stock generators and such, shop owners have to take up valuable shelf space that could have been used for other items.

Good thing you are a law professor and not a retailer. Nobody is going to stock anything on the 1% chance (which is about the highest risk of a hurricane hitting a particular spot along the Gulf or Atlantic coasts) that they will be able to jack up prices for a day or two a year.


J.F. Thomas responding to the italicized words.

What Whitman is saying is perfectly consonant with the idea the few generators which are stocked should command high prices, hence it is not gouging when the prices are had.

As for your "point" Thomas, a clueless person complaining a valid point is clueless, that's priceless.

Yours, TDP, ml, msl, &pfpp
8.19.2008 10:05pm
Dan Weber (www):
What if I don't raise prices during a disaster, but my prices are always high?

You can call it the "Hundred Dollar Store." A gallon of water? $100. A package of batteries? $100.

I only seem to be open when it hits the fan, though.
8.19.2008 11:50pm
UsetaBDCLawyer:
Somewhat dumb question here, but...

For those who support "anti-gouging" laws, what's the difference between forbidding the raising of prices and requiring that they be lowered? I mean, if some can't afford gas hiked up from $3.00/gal. to $6.00/gal., justifying the gas station owner being barred from raising prices to a level that the demand accomodates, well there are surely others who can't afford the $3.00/gal. in the first place. Why then should the rule not be that, in a time of "emergency", all "necessary" supplies should be free of charge? The effect seems to me to be the same: an owner of goods is forced to part with them at a price below which he believes the market will bear? If the answer is that, if you force people to give their goods away, then there will be no mechanism to control demand, then we're back where we started, right?
8.20.2008 12:52am
ReaderY:
Let's take a concrete example and apply it step by step.

Let's take the example of generators. Although equations tend to be continuous, and can calculate the opportunity costs of billions of generators, there will actually be a finite number of suitable generators in the country (or other relevant economic area) that might be available to be moved into a disaster area on short notice. Let's say are 100. Each generator is going to have a finite number of alternative sale opportunities over a short term, and the expected value of that number may well be less than 1 for a short-term period.

Now we ought to be able to calculate, for each generator, a price that would create a higher return for quickly transferring that generator to the disaster area then there would be for any other use over the relevant term.

Now its true that a still higher price might do more over the long term -- say, induce companies to ramp up production or build new factories to produce more generators -- but these long-term results won't have any effects until long after the disaster is over, and it's doubtful a rational player would change long-term planning drastically over a short-term event.

Since there's a finite number, there will an overall maximum price that represents a higher return than otherwise available from any other opportunity.

So if we created a price ceiling that was at or above that maximum price, how exactly are we affecting the economy? We're certainly in effect taxing the generator dealers, since they might be able to get a still higher price because the opportunity costs of buyers in the disaster area (say, people on life support) would be dire. But why exactly would a cap that lies in the territory that's between what people in the disaster area are willing to pay and the return that could be gotten elsewhere represent any actual economic disincentive for the generator dealer? A rational dealer would still have full incentive to sell to the disaster area because the price, even with the cap, would still produce a higher return than any other available opportunity. Dealers would be incented to do exactly the same behavior they would do if they could charge whatever they wanted. They simply wouldn't make quite as much money.

Where exactly is the disincentive? General principles say there's always a disincentive, but general principles say an essentially infinite number of generators exist (in principle) so that an increase in price would always increase supply ad infinitum, no matter what. And we know in the real world that just isn't so.
8.20.2008 2:04am
ReaderY:
In brief: in the real world where all numbers are finite and all equations are discrete, returns don't just diminish. At some point they actually vanish completely.
8.20.2008 2:09am
ReaderY:
Apologize for accidentally submitting too early

Raise the price beyond that vanishing point, and no economic substance is actually occurring. What's happening is a wealth transfer, nothing more. A reverse or offsetting wealth transfer, so long as it stays beyond the vanishing point, won't result in economic substance coming into being.
8.20.2008 2:14am
Joe Bingham (mail):
ReaderY,

So you think the supply curve for generators is vertical over the short term and the long term? Seriously?

If so, it's amazing how you can have such an incredible imagination and yet so little imagination at the same time! (Usually I find, when people argue that supply/demand curves are vertical, that they think because they can't figure out how to supply more of something, it can't be done.)
8.20.2008 8:03am
Joe Bingham (mail):
Nevermind, ReaderY, rereading your post I think I see--you're arguing that it's vertical over the short term, and that the long term shouldn't (or just won't? you say no rational actor will do it) be taken into account.
8.20.2008 8:05am
Ryan Waxx (mail):

The Wednesday after Katrina (which as you recall struck on Monday), the Sam's Club in Baton Rouge received three tractor trailers full of generators which they sold at regular retail. They were literally selling them out of the back of the trucks. Louisiana's anti-gouging laws did not prevent them from keeping generators in stock and reacting quickly to the market.


As usual, you miss the point. The point is, that if one was allowed to make even greater profit, there might have been five tractor trailers in the back of sam's club, because the increased potential for profit would provide more incentive to gamble on the possibility of bringing too much. Or someone else other than a huge retailer who can reabsorb any extras back into inventory might take the chance of bringing in a few trailers, increasing the supply even further.

Oh and for all the Wal-Mart bashers, this is yet another example of that evil corporation's victimization of the masses. Have a nice day.
8.20.2008 8:18am
J. F. Thomas (mail):
The point is, that if one was allowed to make even greater profit, there might have been five tractor trailers in the back of sam's club, because the increased potential for profit would provide more incentive to gamble on the possibility of bringing too much. Or someone else other than a huge retailer who can reabsorb any extras back into inventory might take the chance of bringing in a few trailers, increasing the supply even further.

Sorry, where in my example did I say that they ran out of generators? Why is oversupply a good thing?
8.20.2008 10:39am
J. F. Thomas (mail):
Why then should the rule not be that, in a time of "emergency", all "necessary" supplies should be free of charge? The effect seems to me to be the same: an owner of goods is forced to part with them at a price below which he believes the market will bear?

Actually, if the emergency is serious enough this is exactly what happens, although of course we don't force individual business owners to provide free supplies but we rely on charitable organizations and the government to provide aid, both direct necessities (food, shelter, medicine, water) and cash aid to the victims of disaster.

I live a block from a fire station in New Orleans. When I returned after Katrina (about four weeks after the storm) I could walk up there and get free water, MREs, ice, and even gasoline for my generator (although I didn't need that as my power was already back on). Various agencies continued to supply free ice, water, meals until well into 2006.
8.20.2008 10:50am
Virginian:

What if I don't raise prices during a disaster, but my prices are always high?

You can call it the "Hundred Dollar Store." A gallon of water? $100. A package of batteries? $100.

I only seem to be open when it hits the fan, though.


Back when I was in college, Massachusetts had a law banning "happy hours" (I know it's absurd, but it's Massachusetts!). So some bars had certain brands of beer that they only sold on Fridays from 4-6, for the "regular" price of $0.50.

Maybe Home Depot can stock special "hurricane" plywood and generators that are priced extremely high and they can conveniently run out of the regular stuff during storm season.
8.20.2008 10:59am
Joe Bingham (mail):
JF Thomas's Baton Rouge example (where generators and gasoline were readily available immediately after a storm at a normal price) is irrelevant--goods that're that easy to immediately deliver after a hurricane aren't candidates for "gouging"; the supply curve is obviously pretty flat for that good in that area.
8.20.2008 11:06am
J. F. Thomas (mail):
JF Thomas's Baton Rouge example (where generators and gasoline were readily available immediately after a storm at a normal price) is irrelevant--goods that're that easy to immediately deliver after a hurricane aren't candidates for "gouging"; the supply curve is obviously pretty flat for that good in that area.

So what is a relevant example? I'm confused. Baton Rouge was the closest place to the storm zone where gasoline was available at any price.
8.20.2008 11:09am
David Drake:
Another negative aspect to "price gouging" prohibitions:

High prices in emergency situations have the effect of efficiently rationing scarce goods to those have the greatest need for them and are hence willing to pay more. The people purchasing plywood for $40.00 a sheet are going to be those who have large windows that they need to cover before the storm hits or after the storm blew out their windows, and not those who are, say, building a doghouse.

The response to high-priced concert tickets is rational looked at in this manner: For some, it would just be "nice" to hear, for example, the Eagles; for others (let's say an attorney with an older client who raves about the Eagles), it is close to a necessity and these are willing to pay much more for them.

So the effect of higher prices in time of scarcity not only induces greater supply but also reduces demand, both through non-cooercive means.

And, as Mr. Thomas points out in the previous post, in the case of really critical items like food and water, the government or NGOs can provide them "free" (that is, at no cost to the consumer.) And, as we recall from Hurricane Katrina, government and NGO supplies appear immediately after the storm at the time and place when they are most needed. (sarcasm)
8.20.2008 11:24am
J. F. Thomas (mail):
The pro-gouging argument seems to be that there will be more supply of gasoline (or whatever) if retailers are able to charge whatever the market will bear. But this doesn't hold water in the light of real world conditions. Gas stations aren't going to invest in additional storage capacity or emergency generators on the 1% chance that they will be able to double their prices for one day a year. Of course they would also have to convince employees to stay rather than evacuate and take the risk of not evacuating themselves. Delivery trucks aren't going to be able to provide additional supplies, because again the roads are clogged with people leaving the evacuation zone (and major roads are often closed to inbound traffic).
8.20.2008 11:26am
shawn-non-anonymous:
As a Floridian, I understand the emotional desire for anti-gouging laws and as someone with a formal business education I understand the economic advantage of not having these laws.

In my gut, though, I cannot help but envision my family and I, in our car, creeping along on the I-75 evacuation route, running out of gas and being forced to ride out a Katrina-like storm in our car. I know it's emotional. However, evacuation routes create short-term monopolies on essential items like fuel. If I don't have enough cash to re-fill my tank at $50/gallon, how do I evade the storm?

Who cares about the price of a generator? I don't need one to survive a storm and I don't need one to survive the weeks after a storm. Let them charge what they want. I'm more worried about the sorts of things I need to live through such an event.
8.20.2008 11:56am
Ryan Waxx (mail):

Sorry, where in my example did I say that they ran out of generators?


You said nothing whatsoever either way, and I doubt you even know.


Why is oversupply a good thing?


A person with a sense of irony might note that you put this in my mouth right after accusing me of doing the same. I'm not arguing for oversupply, I'm arguing for the right amount of supply. And to answer your question literally, oversupply especially across multiple sellers tends to bring prices down. Which is what you wanted, right?
8.20.2008 12:10pm
Ryan Waxx (mail):

If I don't have enough cash to re-fill my tank at $50/gallon, how do I evade the storm?


About the same way you'd evade it if there was no gas at any price.

BTW, why is everyone speculating on ridiculous increases with impunity? Is there no point between 4$/gallon gas and 50$/gallon with liberal math?
8.20.2008 12:13pm
HeinLover (mail):
Out of curiousity, I'm curious if the anti-gouging position would change if we were to use an analogy for gas: a sole toll-road route out of a place where a hurricane was about to strike. Would the analysis still advocating changing a $3 toll to $12 or higher simply because it now controls the only road out of town that everyone in town now needs to use?

The truth is, when a natural disaster like a hurricane is about to strike, some goods providers become localized monopolies. People need the goods and the supplier or goods is not readily substitutable, i.e., the consumer cannot easily find replacement (generators) or travel to acquire such goods (gas). Anti-gouging laws should be seen as an enforcement against localized monopolies which arises only in a particular situation.
8.20.2008 12:14pm
byomtov (mail):
Joe Bingham,

You're right. I'm not very empathetic about this.

Only a limited number of people can attend any given show. There are only so many seats. If it's a sellout many people who would like to see it don't get to, for various reasons. Maybe the tickets were too expensive for them to begin with, or they didn't order in time, or they had some conflicting obligation.

It's a bit of a disappointment, I suppose, but doesn't strike me as a shattering experience.

Further, I fail to see why enforcement of anti-scalping laws has much to do with it. Are you claiming that the enforcement adds a premium to the sclaper's price, and that that premium is just enough to price you out? I find that dubious, but even if true not worthy of more than a smidge of sympathy.
8.20.2008 12:14pm
Ryan Waxx (mail):

Would the analysis still advocating changing a $3 toll to $12 or higher simply because it now controls the only road out of town that everyone in town now needs to use?


There are no privately owned toll roads that are the only route out of a major city, hence the comparison is invalid
8.20.2008 12:25pm
Adam J:
Ryan Waxx- "There are no privately owned toll roads that are the only route out of a major city, hence the comparison is invalid." A question is invalid because its hypothetical?
8.20.2008 12:35pm
Adam J:
byomtov - Nice comparison... I can see how you equate being able to prepare for a disaster with the ability to see a show.
8.20.2008 12:38pm
Adam J:
Sorry Byomtov- I just realized that you didn't originally make that comparison
8.20.2008 12:43pm
Ryan Waxx (mail):
Its somewhat beyond just hypothetical, since there is nothing that's even close to the scenario you paint.

Not that I don't understand why you are doing it: After all, purposefully conflating government (toll road) behavior with private individuals allows you to nullify the greatest danger to your argument - the profit motive and its effects.

So yes, if you carefully construct a scenario designed to eliminate private, self-interested actors and a free market, and posit a monopoly because you created one with your example that doesn't exist in the real world, you can get your desired result.

And none of it is relevant.
8.20.2008 1:12pm
HeinLover (mail):
Ryan, a number of toll roads are privately owned these days, including a number I regularly use. Try to make a valid comparison.

My point wasn't to remove the so-called "evil" profit motive of private business (which I think should infect more of government but then all the private marketeers will piss and moan about higher taxes), but rather to point out the result is the same -- people can't leave due to a localized monopoly which you never really addressed in your attempted rebuttal.
8.20.2008 1:20pm
Guest 2L:
Ryan Waxx:

I think HeinLover's toll-road point was that real-world goods providers might become localized monopolies during an emergency. I don't think he's trying to eliminate "private, self-interested actors" in his line of thought. He's trying to suggest that free markets don't necessarily exist during an emergency. That's not an irrelevant point.
8.20.2008 1:20pm
Guest 2L:
By "free markets" I meant "competitive markets."
8.20.2008 1:23pm
Angus:
BTW, why is everyone speculating on ridiculous increases with impunity? Is there no point between 4$/gallon gas and 50$/gallon with liberal math?

Without anti-gouging laws, isn't there impunity (at least under the law)?
8.20.2008 1:46pm
Prufrock765 (mail):
Am I reading correctly?
Do JFThomas and his ilk want the law to allow them the luxury of blithely humming along, living in a hurricane zone not making any contingency plans (like buying a generator or water or fuel or whatever at "non-gouging" prices), while at the same time forcing a supplier who plans ahead and acquires, stores, and bears the risk of loss for assets that can be later sold for a premium, to then sell those assets at an arbitrarily determined, artifically low price?
8.20.2008 1:47pm
Dan Weber (www):
I can think of a few reasons why raising the prices on toll roads could be forbidden while allowing other prices to raise with the market.

1. It's not increasing supply. Toll roads are a good example of rent seeking. While $10-a-bag ice could cause outside entrepreneurs to drive their refrigerated trucks into the disaster area, no one is going to build new roads. (I suppose we could bring up the example of someone building an exclusive private road specially designed for fleeing the area.)

2. It doesn't reduce demand in a useful way. $10 a bag ice discourages trivial use. But when we're trying to get people out of the city, we want to use as much road as possible. There does come a point where more traffic causes all traffic to slow down (although what's more often the case is that there is a bottleneck further down the road, and so traffic fills up behind that bottleneck), but there's no reason to think that the entity pricing the road will worry about this utilization.

3. A road can actually be rationed effectively by the government. Cops can let people onto the road at an optimal rate for maximum throughput, with knowledge of what's going on further up the road (although this obviously creates issues with backlogs before the cops). One big problem with price-caps on general goods is that it is difficult to enforce limits. A gas station owner might limit each customer to 10 gallons, but more likely is that the owner wants to sell through his stock as quickly as possible so he can get out of town. You've stopped the owner from gouging, but the first guy in line who filled up his tanker truck can now change market rates.
8.20.2008 2:23pm
Zubon (www):
The pro-gouging argument seems to be that there will be more supply of gasoline (or whatever) if retailers are able to charge whatever the market will bear. But this doesn't hold water in the light of real world conditions.

The Munger link was posted long before this comment. You have empirical evidence to the contrary: people can and do respond to higher prices in emergencies by increasing supply.

As has been stated numerous times, those "real world conditions" under which supply cannot expand apply when any pricing is irrelevant because conditions are too bad to sell anything. Which makes price gouging laws irrelevant.
8.20.2008 2:27pm
Kirk:
J.F.,
Actually, if the emergency is serious enough this is exactly what happens, although of course we don't force individual business owners to provide free supplies [emphasis added]
Umm, can you explain why you say "of course"? Using government force to set prices is exactly what you've been advocating here!

And please, there's no "pro-gouging" argument being made here by anyone. What people are making is a "government has no moral authority to set prices" argument.

Prufrock765, as far as I can tell that's exactly what's being proposed.
8.20.2008 2:36pm
Adam J:
Prufrock765 - "arbitrarily determined, artifically low price?" I'm not sure how the market price during non-emergency conditions would be considered "arbitrary". Suppliers don't "acquire, store, and bears the risk of loss for assets" just to sell at a premium if and when a emergency happens. Suppliers don't rely on emergencies to occur in order to squeeze out their profit, that would be retarded.
8.20.2008 2:41pm
Golda:
Whether or not anti-gouging laws are a good idea, the argument in this post is absurd. What evidence is there that store owners would overstock in non-emergency times? Not only is that perverse on a quarterly reporting basis to the stores bottom line but owners risk losing all that overstocked inventory in the natural disaster, which they cannot even begin to afford to insure.
8.20.2008 2:54pm
roystgnr (mail):
What always bothered me about gouging laws is that by necessity they only apply to the sellers doing the least gouging, because those are the only ones who are going to be able to complete a sale.

During one post-hurricane recovery years ago I recall reading indignation about small generators selling at 100% markup and thinking, "If that got to 200% it would pay well enough for me to buy them retail here and drive a truck full of them to the disaster area myself." So was I gouging? If not, but if I'd been willing to drive down there and sell at only 100% markup, would I become a bad person for lowering my price by 1/3? Why would people pick on the prospective seller who is offering the best deal to someone in need, when there's a whole country full of people like me who could have chosen to offer better deals but didn't?
8.20.2008 3:08pm
Adam J:
Kirk- The idea that government has no moral authority to act coercively in emergency situations is just bizzare. Do you think there's no moral authority to have a draft in wartime either. The issue is whether "price gouging" is suppliers exploiting a localized market to the detriment of consumers or whether its efficient resource allocation that benefits consumers. Do try to keep up.
8.20.2008 3:12pm
Avatar (mail):
There's an additional problem with foreseeable natural disasters and price gouging.

Say you're running the local grocery store, and there's a storm headed your way (maybe). You've got a pretty good stock of bottled water, and you figure you can mark it up 15-20% and it'll still sell out well before the storm gets there. Or... you can wait until after it hits, and then people with no potable water will pay 100% more.

You, as an enterprising retailer, can order more supplies, and see if a trucker is willing to brave the weather to bring you more water... or, well, you could just not sell half the water you've got in stock. In fact, doing that only helps create the shortage that would drive up prices later - people who bought early at a modest markup aren't in the market later anyway.

That works directly against local disaster preparations. You don't want people speculatively hoarding emergency supplies because they think they're going to appreciate in market value; you want them speculatively hoarding emergency supplies that they're actually going to use if the emergency occurs. Also specifically, you want those supplies distributed before the emergency as much as possible, because in the aftermath of a hurricane, you want people to stay in until you get the roads cleared and the downed power lines safe - there's an actual safety issue involved. You DON'T want people forced to go searching for emergency supplies that a retailer hoarded against a higher market clearing price.

With price gouging laws, there's no incentive to hold back supplies; you can take the markup you're permitted right away, blow everything out the door, and close up shop. ;p

Does that mean that, in a situation where supplies are scarce relative to demand, people who did not prepare may find the shelves empty? Yup. But if you look at that from the perspective of disaster relief officials, that's just the way you want it. You want people thinking "gee, the last time there was a hurricane, it was really hard to get supplies; maybe I ought to have a permanent stock of emergency food/water/batteries/whatever!" The more people who think like this, the easier the actual supply crunch gets when an actual emergency happens.
8.20.2008 3:27pm
Adam J:
roystgnr - an interesting question, but you wouldn't be able to "gouge" and bring the generators directly to the disaster area if the retailer you purchased from was already gouging and selling them at 200% markup. By driving scarce goods directly to the disaster area you're providing an additional service above and beyond simply selling them at your store too.
8.20.2008 3:30pm
Lucius Cornelius:
I lived in a real mother of a disaster area: St. Thomas in the Virgin Islands after hurricane Marilyn in September 1995. You complain about going a few days without electricity? Try going over two months!

Okay, I was one of the luckier ones...I was off island at a 2 week litigation seminar when the storm hit and did not get back until 10 days after (on the first commercial flight...which was loaded with Red Cross and National Guard personnel). I did not see much price gouging after the storm...it was difficult to tell since island prices were always high. Actually, I noticed prices go up whenever there was a storm lurking in the mid Atlantic.

Gouging does not seem to work too well. People in a community will remember who the bad actors were (and will remember the heroes too...the ones who help their neighbors). I think that anti-gouging laws could be ineffective because the legislature will always look at the problems from the last disaster and may not recognize that situations will change (people will remember the gouging and be more likely to take precautions...after Marilyn, people on St. Thomas were MUCH more prepared for storms with supplies of water and canned food...and generators everywhere).
8.20.2008 5:08pm
Elliot123 (mail):
"Would the analysis still advocating changing a $3 toll to $12 or higher simply because it now controls the only road out of town that everyone in town now needs to use?"

A road has a given capacity. It can carry X number of cars past a given point at Y speed per hour. These roads tend to become blocked and clogged since they were not built for efficient evacuation. So, limiting the number of cars is desirable in an evacuation. Higher tolls will reduce traffic and encourage car pooling, which also reduces demand for gas.
8.20.2008 7:55pm
DiverDan (mail):
The economic analysis of price-gouging laws is straight forward and compelling. These laws just do not work as intended, and in fact exacerbate shortages. The whole problem with this post is the untenable assumption that public policy is made based on logic or sound economic principles - it is not. In a democratic regime where at least 90% of the voters are economically illiterate (no, that's not a jab at Florida - Florida is probably better off than most states simply because it apparently makes it so hard for the truly stupid to vote, see 2000 Presidential election), public policy is made based upon the approval of the uninformed. If the uninformed, like those who never buy emergency supplies until the hurricane is upon them, feel put upon or used by retailers who act rationally by raising prices when demand goes up, they will demand laws like the anti-price gouging laws. Arguing about the illogic of these laws is an amusing intellectual exercise, but don't be deluded into thinking that logic or economics will sway public policy against the flood tide of voters who will not think about or understand either.
8.20.2008 8:00pm
scooby (mail):
I hope that lawmakers and voters will come to understand these realities, and repeal anti-price gouging laws before the next big natural disaster occurs. But I'm not optimistic about it there's not a snowball's chance in hell that would happen.

There, fixed it for you.
8.20.2008 8:11pm
J. F. Thomas (mail):
These laws just do not work as intended, and in fact exacerbate shortages.

Really, do you have data on this?
8.20.2008 8:12pm
ReaderY:
I think's pretty clear that fire departments would be much better off economically -- they could command higher prices -- if they operated on a similar basis to gas and generators dealers, charging what the market for the service will bear at the time and simply leaving to burn the buildings of whoever wasn't willing to pay.

One could argue that society as a whole would be better off for this, it would teach people not to take care in building buildings and to avoid fire hazards.

Of course, one could also achieve such goals by regulation, building and fire codes and the like.

Would a laissez-faire society, with for profit fire companies with unregulated pricing and no building or fire codes, truly be better off then our present system:

One thing to consider: fires spread in crowded cities, so the consequences of people's carelessness (or frugalness) aren't felt only by themselves. One can't so easily isolate people from each other so that consequences affect only the actor.

It seems to me this is true, not only in the fire example, but in this one as well. If people can't afford gas their cars will stall, blocking the road both for people who have gas and those who don't (it's not as if the numbers of ways to go are infinite or as if people's driving behavior affects only themselves.)

Similar, those injured because they have inadequate protection will clog hospitals, reducing the quality of care for those who could afford or had the foresight for adequate precautions.

I never understood this concept of an isolated universe where people's behavior is somehow insulated from affecting others so that people can who engage in thoughtless behavior can suffer harm with, magically, no-one else around them being affected or hurt.

Nor do I understand why not thinking about something is always such a bad thing, so that a society in which
"thoughtless" people are severely punished from failing to take appropriate preparations themselves for various potential obscure disaseter risks is somehow better off than one where a small number of people focus on prevention and amelioration so that others can focus on other productive endeavors.

If this thinking were valid, one would think an amoeba, which has extremely little regulation among individual cells, would be a demonstrably better thing to be than a primate, whose cells have extreme specialization and cooperation so that the tools necessary to address various risks are possessed by a few specialized cells and the others don't even have the ability to worry about them. What makes a primate a worse life-form -- on any scale of success or value -- than an ameoba?
8.20.2008 8:59pm
David Schwartz (mail):
ReaderY: Your amoeba/primate example is inapt. Competition is, in fact, a highly sophisticated form of cooperation. It's the best know way to make possible the specialization and mutual benefit that primate cells benefit from on a larger scale.
8.20.2008 9:34pm
Dan Weber (www):
I think's pretty clear that fire departments would be much better off economically -- they could command higher prices -- if they operated on a similar basis to gas and generators dealers,

Fire departments used to act like that. Then communities decided to go to the neighborhood-wide pre-paid model, where they pay to maintain the fire department and the fire department is responsible for putting out all fires in the neighborhood. It's worked out well for all sides.

What communities didn't do was forcibly take ownership of existing fire departments and force them to fight fires at gunpoint. You can still buy your own private fire protection.

If communities want to maintain vital services during emergencies, they should enter into voluntary agreements ahead of time with enough parties as needed to keep things going.
8.20.2008 10:42pm
Joe Bingham (mail):
Further, I fail to see why enforcement of anti-scalping laws has much to do with it. Are you claiming that the enforcement adds a premium to the sclaper's price, and that that premium is just enough to price you out? I find that dubious, but even if true not worthy of more than a smidge of sympathy.

When the laws are successful, they make it impossible to buy tickets at the market rate; when they are partially successful, they add a premium to the market rate.

Matters of principle shouldn't really be decided on how much sympathy the unfairly treated party garners from unaffected people, but the downside of democracy is that rationally ignorant people like you get to vote on issues like this--about which you don't care, and which you admit you don't understand.
8.20.2008 10:49pm
Adam J:
David Schwartz - What are you talking about? Competition is definately not cooperation. Competition, when properly directed, can be good for society because it provides incentives for improvement... but that certainly doesn't make it cooperation.
8.21.2008 11:11am
Adam J:
Weber- "Fire departments used to act like that" ... and fire departments would exploit the emergency to charge prohibitive prices.

"If communities want to maintain vital services during emergencies, they should enter into voluntary agreements ahead of time with enough parties as needed to keep things going." There's probably holdout problems there, plus tremendous transaction costs in negotiating with every company that supplies emergency services. Also, companies voluntarily go into the gas business, they are free to leave it if they don't like the anti-gouging laws.
8.21.2008 11:17am
Automatic Caution Door:
The real argument against banning price-gouging shouldn't involve economic theories, "desirable outcomes" and the rest of it. The real argument against banning price-gouging involves freedom: All of you have no right to tell me what to do with my property. It's not yours. I'll offer it for whatever "price" I want.

It's pretty simple, really. The dozens of posts here all loaded up with numerals and percentage symbols and "if X this then Y that" are a waste of time, and cloud the issue.
8.21.2008 11:27am
Adam J:
Automatic Caution Door- as I pointed out before, we allow the state to use coercion in emergencies when its beneficial to society. For example, the state can draft people against their will during war, the state can put people in prison against their will when they commit a crime, the state can force people to obey a contract against their will, the state can force people who act unreasonably to pay for the damage they cause, etc. etc. Complete freedom is anarchy, and it tends to not work very well.
8.21.2008 11:36am
Elliot123 (mail):
It would be nice if retailers kept their stores open as long as possible both before and after the storm hits. Extending hours would also be a positive factor.

But, why should they bother? Why take the risk?
8.21.2008 12:48pm
PatHMV (mail) (www):
We've explained a variety of reasons, Elliot. Get good will from the community; sense of obligation; the profit to be made that comes from selling out your entire inventory. And I'd again point out that "price gouging" is not merely increasing your prices because your expenses have gone up (if you must pay your workers an extra $10 per hour to work during the storm, that's higher costs you can pass along).

I'd note that despite my earlier challenge, not one of the libertarian anti-price-gouging-law folks has provided ANY hard data to support their theory that such laws increase scarcity of goods in disaster situations.
8.21.2008 12:53pm
PatHMV (mail) (www):
And Automatic Caution Door, the law doesn't require you to sell your property at any price. The law prohibits you from selling it at a gouging price. If you'd prefer to close up shop and not sell at all, you're perfectly free to do so. Feel free to lock the doors and put up a sign telling your customers: "Because the government won't let me sell my goods to you for 3 or 4 times the normal price during this crisis you're going through, I've decided not to sell at all. Have fun in the storm!"
8.21.2008 12:57pm
David Schwartz (mail):
Adam J: Competition is one specific type of cooperation. Really. I'm not lying. Look up "cooperation" in a dictionary if you don't believe me.

Companies compete with each other because it jointly benefits them to do so. Buyers and sellers participate in a competitive market because they all benefit from doing so.

This is true not just of economic competition. It's true of other kinds of organized competition as well. For example, in the Olympics, the athletes are said to compete with each other. However, the athletes, host nation, organizing committees, media, and so on are all cooperating with each other to their mutual benefit by competing. They all cooperate to maintain the system of competition that benefits them all.

The same is true of an economy. When two companies compete with each other, they are cooperating with each other and their potential customers to maintain a system that benefits them all.
8.21.2008 5:14pm
David Schwartz (mail):
A good microcosm to look at is eBay. It's perfectly valid to describe eBay as sellers competing for scarce buyer dollars. But that's an artificially narrow view.

A wider view is that buyers, sellers, and eBay compete to provide a vibrant marketplace from which they all benefit. Sellers benefit from the buyers that other sellers bring to the marketplace, even as those sellers out-compete them for scarce dollars. All agree on the ground rules, all play by them (or suffer the consequences) and all benefit.

A capitalist economy is just like this. All agree to play by a set of known rules because all benefit when they do so. To see the competition and miss the larger cooperation that it's a part of it gives a seriously warped view.

Capitalism is about cooperation for mutual benefit. Competition is an example of a type of cooperation.
8.21.2008 5:51pm
Elliot123 (mail):
"We've explained a variety of reasons, Elliot. Get good will from the community; sense of obligation; the profit to be made that comes from selling out your entire inventory."

Good will and obligation are vastly overrated and hardly driving forces in the economy. Why should he sell out his entire inventory if the logistical situation is such that he can't get replenished? That just means that after the event he has no stock, but all his competition does. It's much more rational to take the time off.

Price controls encourage him to shut down.
8.21.2008 7:11pm
Brian K (mail):
"Companies compete with each other because it jointly benefits them to do so."

i bet you if you asked a company if would rather have a monopoly or be in an extremely competitive market almost none would opt for the latter.
8.21.2008 8:14pm
Dan Weber (www):
There's probably holdout problems there, plus tremendous transaction costs in negotiating with every company that supplies emergency services.

Who said they needed to negotiate with every company?

The government wants to make sure there are adequate supplies available to the community. The easiest way to do to contract with various retailers who, in exchange for payment, agree to keep a certain amount of stock in inventory at certain times of year, and to keep regular prices and business hours as long as possible.

See, it's about finding a solution that's mutually beneficial to all sides. "Win-win," if you will.
8.21.2008 8:44pm
David Schwartz (mail):
"i bet you if you asked a company if would rather have a monopoly or be in an extremely competitive market almost none would opt for the latter."

So what? That doesn't refute my point. Sure, I'd rather have friends who watch my pets and pick up my kids without me having to help them in return. But since I don't have that option, instead my friends and I cooperate and do favors for each other.

You can't argue that two people aren't cooperating just because they'd prefer to take advantage of each other. They're cooperating so long as they act in a coordinated way for mutual benefit.

Athletes at the Olympics cooperate when they compete, even if they'd prefer the other athletes just concede them all the medals. They, of course, aren't cooperating when they cheat or dope -- they're going against the rules. So not everything that one could call competition is necessarily cooperation. In fact, the use of fraud, for example, is not within the scope of cooperation. But fraud is the exception, in both the market and the Olympics, not the rule. Cooperation is the rule.

A competitive, capitalist market is a form of cooperation, just like the Olympics are. All the participants work together to achieve a mutual benefit. All agree to, at least mostly, play by the rules.

This is a key issue of viewpoint. It is a serious mistake to think that a capitalist market is not an example of mutual cooperation for mutual benefit -- that is in fact exactly what it is.

Why do I compete for your business rather than breaking into your house and stealing your stuff? Because, if nothing else, I know that ultimately that won't benefit any of us.

The breaking of the rules, in the market and the Olympics, is the exception rather than the rule. And for the exceptions, there are enforcement mechanisms. But largely, it is simply cooperation for mutual benefit -- whether or not any participants particularly care that benefiting others happens when they benefit themselves.
8.22.2008 2:05am
Elliot123 (mail):
"i bet you if you asked a company if would rather have a monopoly or be in an extremely competitive market almost none would opt for the latter."

I bet if you asked them if they wanted competition among their suppliers, they would say "yes."
8.23.2008 2:02pm