A man has just robbed a train. A Rock Island Rail car was held up in the desert of North Texas on route from Chicago carrying dozens of passengers and tens of thousands of dollars in a Wells Fargo express compartment. The men were slain and the women and children are kidnapped.
You’re the sheriff in charge of the investigation. In a case like this, tried and true procedure is to put a bounty on the man’s head. That gets everyone interested in looking and bringing this man to justice. An everyday 2-bit robber might get a bounty of a thousand or ten, but this is an emergency. You set the bounty at $200,000, dead or alive.
This bandit ain’t getting away easy.
With two major hurricanes in the last couple of weeks, “price gouging” is in the news. Whether it’s $10 for a gallon of gas in North Carolina or $2,000 flights out of Tampa, charging high prices during an emergency is extremely unpopular.
The reasoning is intuitive: when someone is in a desperate situation, they might be willing to pay high prices for basic goods like gas or water, but charging them these high prices is taking advantage of their misfortune.
But imagine if you were the sheriff of Ashville, NC, and it was your job to get more gasoline and bring it into town. You might offer a bounty of $10 a gallon, dead or alive. That’s a lot more than the usual everyday bounty, but this is an emergency. Anyone who can get gas into western North Carolina should be rewarded because that’s where people need it most.
Prices aren’t just a transfer between buyer and seller. They’re also also a signal and incentive to the whole world economy to get more high-priced goods to the high-paying area; they’re a bounty.
Whether you’re chasing train-gangs or gasoline the last thing you’d want if you were the sheriff is a cap on the bounty price you’re allowed to set.
High prices on essential goods during an emergency are WANTED posters, sent out across the entire world economy imploring everyone to pitch in and catch the culprit.
The difficulty that many people may have in paying these higher prices is a serious tragedy, and one that can be alleviated through prompt government response e.g by sending relief funds and shipping in supplies. But setting prices lower doesn’t mean everyone can access scarce and expensive essential goods. In an emergency, there simply aren’t enough of them to go around.
The central problem remains unsolved: A criminal is on the loose and a hurricane has made it difficult to get these goods to where they’re needed. Setting low prices might mean the few gallons of gas, bottles of water, or flights that are available are allocated to people who get to them first, or who can wait in line the longest, rather than based on who is willing to pay, but it’s not clear that these allocations are more egalitarian.
What is clear is that these allocations are less likely to bring the culprit to justice or to get more goods into where they are needed.
When there’s an emergency and a criminal is on the loose, we want the sheriff to set the bounty high, and catch ’em quick. High prices during other emergencies work the same way. Let the price-system sheriff do his work!
[epistemic status: somewhere between steelman of the complaints and recognition that theory is correct but there’s a lot of details that matter and are ignored in this piece. ]
This is true in theory, but for MANY goods and services, supply is artificially limited by regulations and restrictions on who and how something can be provided, or by emergency conditions that block travel and transport. When these restrictions are controlling (the main reason that marginal supply is slow/difficult), price signals can’t actually get used, and don’t change behavior. This is especially true for short-term shocks, when the price isn’t expected to last long enough to pay for investments.
It’s perfectly reasonable to be angry at the sheriff who spends public funds on a bounty that doesn’t change anything (say, the guy is already in custody, and the bounty is just a giveaway to the lucky person who has him).
Can you give an example?
Marginal supply can come way in advance, well before the emergency, because of anticipation of future ability to raise price. It doesn’t have to be a reactive thing where the price rises first and the extra supply appears afterwards.
Short-term gasoline availability after a natural disaster is a good example. Very high prices do not actually lead to more supply, because transportation constraints are binding, and the road crews don’t get any of the increase in prices. In a model world, it’s good, the gasoline vendors pay some of their earnings to the road crews to prioritize their (very valuable) goods. In the real world, the supply chain is too long and interconnected for price signals to change much in terms of availability.
Over longer timeframes, and for more normal goods and situations, the model is very powerful, and price fixing is extremely harmful. I’m not supporting rent control in any fashion. In fact, I’m not exactly supporting gasoline price limits in an emergency, just pointing out that the usual arguments for price flexibility may not apply.
For even more clarity: I don’t think the line of argument (high prices motivate supply) is valid for this particular case, but I do NOT mean to say that price-fixing is actually justified. It also doesn’t increase supply, and it imposes arbitrary government involvement in private affairs, in a way that usually outlasts the emergency. Slippery-slope arguments are ALSO somewhat weak, of course—I don’t know of an obvious killer argument in either direction. And that’s mostly my point with this comment.
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If the sellers put caps on how many items can be bought by any given buyer, that makes it more egalitarian. Price gouging obviously makes things far less egalitarian by capping by willingness to pay, which varies massively.
The main question is whether willingness to pay correlates with need or with wealth or with mental illness or with greed, to which the answer probably is “all four”, though it’s unclear how much, and the quantities really matter. “Everyone works together” seems like a plausibly-good heuristic during a natural catastrophe, both to minimize conflict, and because natural catastrophes impact a geographic area and so plausibly everyone has similarly high needs.
I disagree with that being “the main question” because:
High prices simultaneously increase quantity supplied and reduce quantity demanded. The OP is foregrounding the supply effect but your comment is purely focused on the demand effect.
It’s possible for willingness-to-pay to correlate poorly with need, but for ability-to-procure-underpriced-items-during-a-shortage to correlate even more poorly with need. For example, the latter might involve having time to wait on line, or savvy ability to know where supplies will open up next, or even worse, being friends with the shop owner, being the police chief, etc.
If a shop charged a high price AND had a cap on how many items can be bought by any given buyer, people would still be about equally angry about the price gouging.
Right, when I said “the main question”, I meant the main question for the local allocation only, in response to “it’s not clear that these allocations are more egalitarian”.
Evidence from wartime rationing is that given a per-buyer cap, people are less angry about price rises. Or perhaps war creates more solidarity than natural disasters.
Maybe a compromise is possible where merchants are allowed to raise the price provided that they have a per-buyer cap and sell their stock quickly.
I guess it depends on your stance on monopolies. If you think monopolies result only from government interference in the market, then you’ll be more laissez-faire. But if you notice that firms often want to join together in cozy cartels and have subtle ways to do it (see RealPage), or that some markets lead to natural monopolies, then the problem of protecting people from monopoly prices and reducing the reward for monopolization is a real problem. And yeah, banning price gouging is a blunt instrument—but it has the benefit of being direct. Fighting the more indirect aspects of monopolization is harder. So in this branch of the argument, if you want to allow price gouging, that has to come in tandem with better antimonopoly measures.
If that last sentence can be rephrased as “the counterfactual benefit is unclear”, then given that the counterfactual cost is clear (beneficiaries need to pay more, potentially a lot more) doesn’t this show that price gouging is probably net negative i.e. aren’t you arguing against, not for, it here?
(Genuine question, not a gotcha. I’m admittedly biased because I dislike the idea of profiting off others’ misery, suspect that purchasing power is moderately anticorrelated with need via wealth/income i.e. fewer DALYs are averted per person helped this way, and find the bounty reframing uncompelling, but I’m willing to change my mind. Another personal bias: I work in the market-shaping for global health space, which is about redressing market failures due to e.g. mismatch between need and ability to pay for it, and I suspect a similar dynamic is at play after hurricanes have devastated an area.)
Buyers have to pay a lot more, but sellers receive a lot more. It’s not clear that buyers at high prices are worse off than sellers, so it’s egalitarian impact is unclear.
Whereas when you stand in line, that time you wasted is gone. Nobody gets it. Everyone is worse off.
Misses my point, but never mind.
A classic that seemingly will have to be reargued til the end of time. Other allocation methods are not clearly more egalitarian and are less efficient (depends on the correlation matrix of WTP, need, time budget, etc., plus one’s own judgment of fairness, but money prices come out looking great a lot of the time). In some cases, even prices don’t perform great (addressed in some comments on this post), but they’re better than the alternatives.
For more reading: https://www.lesswrong.com/posts/gNodQGNoPDjztasbh/lies-damn-lies-and-fabricated-options?commentId=nG2X7x3n55cb3p7yB