Welcome to the formal debate between Squatch and Eliotitus. The subject of this thread will be the relative merits/demerits of what is commonly called “price gouging,” the increasing of prices dramatically by suppliers because of an exogenous factor (such as a hurricane, earthquake, war, etc).
The agenda for this thread is:
1) Squatch’s Position (this post)
2) Elio’s Position
3) Squatch’s Rebuttal of Elio’s Position
4) Elio’s Rebuttal of Squatch’s Position
5) Squatch’s Conclusion
6) Elio’s Conclusion
Discussion concerning this thread and each debater’s position can be found here: http://www.onlinedebate.net/forums/s...y-helps-people
To assist with a clear discussion Elio and I have agreed to an contextual situation. This will provide a clear situation and framework for discussion.
A small town in North Carolina was just hit by a hurricane. As a result the major electrical grids are out and aren't expected to be restored for nearly two weeks. Fuel supplies were suspended the two weeks before the hurricane in an effort to limit the environmental damage that might arise from a fuel spill. Now, the hurricane has passed and fuel supplies are scarce. Gas had been selling at $3.50 a gallon, now it would not be unheard of to pay $7/gallon in underground exchanges. A local retailer has decided to sell his gas at $5.50/gallon because he knows that he can profit off the shortage.
Price fluctuations arising from environmental factors mitigate the harm caused by the disaster by prioritizing demand and increasing supply. Indeed, limiting the price signal’s ability to re-prioritize economic activity following a natural disaster harms consumers by pricing them out of the now limited supply of needed goods and services.
Price gouging is unsavory because we instinctively dislike the motive of the supplier. In Munger’s essay, people clapped, they clapped as the police drove away something they desperately needed because it was emotionally satisfying to see someone who was profiting from the situation punished (even if that person was helping them and incidentally helping emergency vehicles). The supplier is greedy in a situation that should require compassion (a hurricane). He should be helping all these people who need it!
But there is usually a hidden assumption in our compassion. That the supplies are available for distribution, and that the supplier simply refuses to sell them at a reasonable price (we usually don’t consider who determines what is reasonable either). Why a supplier, looking to make money wouldn’t sell his supplies at a profit, but would rather hold onto them at a loss doesn’t make much sense. We don’t necessarily connect the inevitable shortages that result with the price controls, but the connection is there.
It is our desire to prevent what we emotionally think of as exploitation that limits the ability of people to find valuable ways to serve one another. By limiting price changes we mandate shortages and we further mandate that distribution be according to chance rather than need. Price controls in the form of anti-gouging laws don’t limit exploitation, they just mandate going with out.
Rather, as I’ll show below, the ability to raise prices to reflect the current market information relating to the disaster concerning demand and supply has several positive effects.
- It prioritizes demand so that those who want and need the good most get it rather than those who just happen to be first in line. It almost always prioritizes that distribution according to who can provide the most benefit to the community by getting the supply.
- It increases the supply available to the city by making it profitable to bring in additional supplies from surrounding regions. This will actually drive the price down to pre-disaster level plus transport costs only, removing the ability of those suppliers to extract extra value, while increasing the amount of fuel available to people who want it.
- It promotes better planning and reduces shortages during disasters by offsetting the cost of storage, making it valuable to store extra supplies when an event is likely and reducing the shortage resulting from the disaster. While reducing the tendency to horde supplies causing waste.
- Additionally, anti-price gouging laws are ineffective because they can only possibly regulate primary sales. The black market generally sells at the increased price and is generally made up of the people who can afford to wait the longest. So gouging laws simply transfer the profit from a supplier to a reseller whose only value was that he could wait in line.
Finally, one note about prices and what they are. Too often we just assume prices are some number dictated by the person creating the product. But prices are much more than that. They are actually a form of information transmittal. They compile all the various needs and wants and abilities of people in the market, compare them to all the substitutes and complements available for a product and produce a number that effectively transmits the aggregate value of something compared to every other thing.
So as we look into this subject, I would encourage you to keep in mind that the prices being discussed are really requests and offers, status reports on peoples’ wants and abilities, information. And that if we blur that message, or prohibit that transfer of information, we will limit the ability of individuals to be mobilized to effectively find the most valuable ways to serve one another.
A quick disclaimer, I was brought to this idea by a wonderful economics podcast, EconTalk and a discussion the host (a Stanford economist) and Mike Munger (economist at Duke) had concerning an example he had with Hurricane Fran. The podcast can be found here: http://www.econtalk.org/archives/200...n_price_1.html
With many of the points found in his article here: http://www.econlib.org/library/Colum...ergouging.html
First, let’s discuss the likely outcome of the situation briefed above. Due to power outages and other issues fuel consumption will likely be higher in the first week after a hurricane than it was pre-hurricane. So demand will increase. Additionally, because of the uncertainty and restrictions listed, it is likely supply will be lower than normal as well. This can be shown here:
Where we see supply has gone from S1 to S2, and Demand from D1 to D2. We see the result as the new, higher price (P2) and a very similar quantity supplied.
That is one possible outcome. A higher price of goods and a similar amount of goods being supplied.
But let’s imagine our State imposed an anti-gouging law to limit the prices suppliers could charge.
We would then see a quantity supplied represented by Q3
The gap between Q2 and Q3 represents a shortage. That is the amount of goods that people would like to consume at the price mandated, but which aren’t supplied given the current situation. Those are the people turned away from the gas station in our example, or whose generators run out of fuel. They could just as well be an ambulance company or a family with a pregnant wife, at that price level it is first come, first serve and those who don’t have time to wait, lose. The difference represents the material deficit created by the law in the community, the lower amount of fuel actually available to people who need it and who would be voluntarily willing to purchase it at the higher price.
A price increase prioritizes distribution to those who need the good most and who have produced the most utility for society
Price changes always serve to relay a signal to producers and consumers. That signal tells them that that the supply or demand of a good has changed. In our scenario both the supply and demand has changed. The new price relays the opportunity cost in the economy of purchasing the good. We, as a society, have to give up some amount of something to ensure we can get enough fuel. This is because we live in a world of limited supplies, but unlimited wants. The higher price is telling people, “we suppliers can either give you an extra truckload of oranges or an extra truck of fuel, but because of the hurricane, it isn’t both.” With a price control law that signal never gets passed and a shortage develops.
By allowing the price to rise, we are signaling consumers that the relative importance of the goods has increased compared to how much of it we have to offer. Those who need the good less than others will find other opportunities (substitutes or waiting) preferable to the new price. Those who need the good more will forgo other opportunities and purchase the good at the new, higher price. (Which as I’ll point out later will shift supply away from that other good which isn’t needed as much and towards the needed fuel).
Say’s Law also has a role. Since no one can consume until they first produce, those who are able to absorb the higher price level are also those who produced the most utility for society as determined by their willingness to recompense that person or buy their goods. Those who are able to purchase the fuel at the higher price are generally those who produce the most valuable things for society with that fuel.
Of course this isn’t perfect, there are exceptions to this idea. Bill Gates can probably afford to purchase more fuel than an ambulance company and use it for personal consumption based on his stored up wealth (the amount of value he has produced for the economy). But let’s consider the alternative.
Gouging laws prioritize distribution to those who happen to be first in line.
Anti-Gouging laws generally limit price increases to around 10% of pre-disaster prices. As I showed above this creates a shortage. So we know that in an anti-gouging law scenario there will be people at the back of the line that go without.
Essentially, these laws say that everyone’s need for the fuel is the same, that an ambulance doesn’t need the fuel any more than suburbanite. As such, those who go without cannot be determined by need and must be determined by chance.
It isn’t the case that we are distributing the fuel more equitably, we are just artificially limiting the supply and then determining the winners and losers by who happens to be ahead of whom in line. Generally the person who can afford to wait in line during a disaster is not the person most necessary to the community. A firefighter or road crewman can’t wait 8 hours in a gasline to get the gas they need to go to work like an investment banker can (because the market is closed). Thus, the people who tend to be first in line and get the limited supply are just those people who likely need it least and who are in least demand during an emergency.
I would argue a system that measures relative need is a more just distribution than a system that measures the happenstance of where you are in line.
They Encourage Waste
Price gouging laws also produce waste by encouraging hording. When people know a shortage is possible or likely given an event they tend to over stock in case the shortage is longer than expected. This hording inevitably involves some wastage of the goods and a less than optimal distribution of the goods as some of the horde out lasts the shortage and could have been used by others.
This hording tendency is why you see fights and shopping centers pre-hurricane, because prices were not allowed to select the person with the highest need peacefully, violence often results to select who will get the good and who the shortage.
Gouging laws block people from supplying needed goods
Prices have an effect on suppliers as well as consumers as we can see in the graphs I posted above. At a higher price suppliers are willing to produce or ship in more goods. It seems an almost trivial point that a greedy supplier like the one in our example will produce more if prices go up. And it makes sense here. If the price per gallon increases in our town, it becomes relatively cost efficient to ship in fuel from neighboring counties and regions that might have higher supplies (just as the yahoos did with ice in Prof. Munger’s story). This has been the case in the past were entrepreneurs rented 10,000 gallon trucks and shipped fuel into storm ravaged areas to sell at the higher price (in many cases risking jail time for daring to sell fuel that people needed at a price they were happy to pay).
But gouging laws distort that ability. It is not only not-profitable, but is actually costly to ship into an area where prices can’t compensate me for the cost and risk of shipping. Katrina was a great example of this as generators were virtually impossible to get in the weeks following the storms, but where (because of the season), they were on sale in nearby Kentucky and Tennessee. There were literally an overabundance of generators only a few hundred miles away, but because no one could charge for the extra shipping associated with moving them, the people of Louisiana went without power.
This actually happened to a man named John Shepperson, who rented a u-haul and brought in generators following hurricane Katrina. He sold them for twice what he bought them for and was arrested (the generators were, of course, confiscated and never released to the public). Funny thing is, most of the people he was selling too were happy he was there, even if charging a higher price. They would rather have paid the higher price and had power rather than been legally mandated to sit in the dark (the people who wouldn’t prefer that are, of course free not to buy). http://abcnews.go.com/2020/Stossel/story?id=1954352
These anti-gouging laws serve to limit the price signal that diverts supplies to where they are needed most and hurts those consumers who it is aiming to protect. Rather than increasing supply and driving prices back down (in a competitive market down to approximately pre storm levels + shipping costs), we see continued, long term shortages until the situation normalizes.
Additionally, without the ability to recoup additional storage costs, suppliers tend to forgo planning and stockpiling when disasters are more likely. Home Depot can’t afford to rent an extra warehouse for three months to store extra generators in the event of a hurricane if it must charge the same amount as it cost to sell them without the warehouse rental. Additionally, the risk is higher if his upside is limited by a price control. What happens if the hurricane doesn’t come? He is out quite a bit of money. When compared to the limited benefit of profit in a price controlled system, it doesn’t pay to prepare. (Think of a stock that could either go up $5 or down $100. You are less likely to buy it than the same stock that could go up $100 or down $100).
Supply involves positive externalities
As discussed in Prof. Munger's story above and generally treated positively by economist in any other situation, trade involves positive externalitites. In order to get the trucks to the fuel stations, they company might higher laborers to clear the roads, which allows additional supplies, traffic and emergency vehicles to move more freely. That is only one example of a phenomenon recognized by Adam Smith and taught in most micro economic classes today. Trade causes other, infrastructure and societal benefits to evolve (organization, policing, health, etc) in order to support the trade relationship. In disasters, when these societal mechanisms have broken down it is even more important to mobilize resources to restore them. Preventing suppliers from doing that (even if unintentionally doing it) doesn't help the community to get back on its feet, it delays recovery.
Price Gouging laws only transfer the profit from reputable suppliers to more expensive, black market sellers.
The fact is that in most scenarios the fuel or ice or whatever is resold. The people willing to stand in line to get the limited supply aren’t going to turn down a profit (especially since, as I pointed out, they probably have a lower need for it than others). So they resell the good at a higher price under the table. Probably at a price a bit higher than our supplier would have charged if he had been allowed to because there is additional risk of prosecution involved and general risk involved in selling on the black market.
Of course, if that reseller stiffs them or sells them watered down fuel, they don’t have a recourse. That is the problem with under the counter sales. They are more expensive with a higher risk to consumers.
So lets review what our anti-gouging law accomplished.
It reduced supply by limiting the ability to bring in additional goods or to plan ahead.
It then distributed that limited supply according to who was able to wait in line the longest rather than how much individuals needed the good (as expressed by their ability to forgo other items in order to consume it).
It encouraged those people with lots of time on their hands to over consume. Either to stock pile or to resell on the black market. This over consumption (hording) caused waste.
It finally got the goods to those who needed them most but at a higher price according to the risk of dealing on the black market.
It also got less of the good to those who needed it most because it limited the supply (some extra supply via the black market could occur, but most definitely less than would have otherwise happened because of the risk).
Anti-gouging laws hurt consumers be limiting the ability of people to more efficiently react to events and provide needed supplies as determined by those who actually need them. In a system without those laws we might indeed find some questionable individuals getting wealthy with some morally questionable motives. But their ability to get wealthy would only come if they are alleviating the suffering caused by the natural disaster. And in the end, I’m less concerned with whether Exxon is beneficent than if I get the fuel to take my wife to the hospital.