Welcome guest, is this your first visit? Create Account now to join.
  • Login:

Welcome to the Online Debate Network.

If this is your first visit, be sure to check out the FAQ by clicking the link above. You may have to register before you can post: click the register link above to proceed.

Results 1 to 3 of 3
  1. #1
    Administrator

    Join Date
    Mar 2007
    Location
    Fairfax, VA
    Posts
    10,346
    Post Thanks / Like

    "Price Gouging" actually helps people

    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




    Background Situation

    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.





    Bottom Line:

    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



    The Argument

    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.

    Demand

    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.

    Supply

    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.



    Conclusion

    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.
    Last edited by Squatch347; September 16th, 2014 at 12:16 PM.
    "Suffering lies not with inequality, but with dependence." -Voltaire
    "Fallacies do not cease to be fallacies because they become fashions. -G.K. Chesterton
    Also, if you think I've overlooked your post please shoot me a PM, I'm not intentionally ignoring you.


  2. Likes Ibelsd liked this post
  3. #2
    ODN Community Regular

    Join Date
    Apr 2007
    Location
    England
    Posts
    1,151
    Post Thanks / Like

    Re: "Price Gouging" actually helps people

    1: Disclaimer, I'm unsure what I think about price gouging. The following is a defence I'm giving for intellectual purposes of exploring the issue and also because debating is fun. It should not be taken as a statement of fact on my opinion about the issue

    2: Apologies it took so long, work-related things cropped up when I least expected that I had to deal with


    Introduction
    Before I go into the bulk of this argument I want to clarify a few things.
    1: I do not regard it price gouging to pass legitimate costs on the business caused by the disaster on to the consumer. This can be quite reasonably worked into legislation as a defence.
    2: I don’t care about price gouging on non-essential items, I do not believe it productive to get into a definitional debate here about what is and what is not an essential purchase, suffice to say there is a large body of things which are essential and will not be controversial. As I agreed with Squatch, fuel probably falls into this category and as such will debate the issue through the prism of the example given, I however could happily prove it is beneficial when talking about food and construction materials for house repair alone and would consider that a successful defence of anti-price gouging legislation.
    3: Price gouging legislation need not, and should not be the only thing happening to relieve crisis in the area. Even if were however, I will still contend it is better to do than not do.
    In the body of this text I’m going to talk about what is a socially equitable distribution of goods and services and why we might or might not believe in that. Essentially it’s the philosophy section of this essay; to what extent can we compel people to look after others.
    Secondly I’m going to chat about who gets goods with and without price gouging, why the distribution is more equitable by the criteria set out in my first section with price gouging legislation. Within that I’m going to talk to you about the human cost on the most vulnerable, and perhaps unsurprisingly make the case that these are the people we should care about.
    In the final section I’m going to talk about achieving sufficient supply, explain the ways in which it is possible while things get back to normal. I’m also going to maintain that “maximum supply” possible through market incentives is not the same as the optimum situation for people in the area, if that maximum supply comes at the cost of demolishing the poorest’s savings so they can live a subsistence lifestyle during a disaster, or worse be totally priced out of essentials, then some people not being able to buy all they would like to is fine by me.

    1: Socially equitable
    (A)Property rights

    The debate topic is if it’s good for people or not so the issue of property rights is probably a peripheral one and I just hang out with libertarians too much. Conceivably the issue of property rights be something we think is most important in terms of the nebulous concept of “good for people”, though it does not seem to be contested by Squatch so mainly for the sake of as much completeness as possible I’m going to treat it here. Philosophically at its core the ability to own things is an extension of personal liberty, something we should guarantee unless we’re able to demonstrate severe and important restrictions on others (this is all very superficial I know, but I don’t want to invest too much time in an only lightly contested issue). Why ought then we be able to force people to sell things for cheaper than they might otherwise be sold for.

    (1) They were almost certainly willing to receive the lower price for the goods if not for the exceptional circumstances here. The events in question were not a fortuitous work they brought about it is them profiting off the random misfortune of others – this does not seem to be a liberty we ought to care about if even a small harm can be demonstrated.
    (2) Price gouging on necessities tangibly screws people over. Deliberately pricing people out of food and the ability to travel to work (gas) in order to maximise your personal gain seems intuitively immoral. People are probably entitled to necessities so they can do things like live (and access all the lovely concept of liberty we might care about) and exploiting disaster for profit by forcing people to spend their savings on these necessities seems mean. The harm is sufficient to limit property rights

    (B) Why we should have an inefficient recovery to limit harm

    I do not, and probably will not contest that allowing price gouging would probably mean more resources in the area. The issue is that those receiving them are also those most able to weather long term harm to their finances. If we are talking about necessities there is no reasonable or fair choice “not to buy”. You can’t decide that the food or gas prices in your area are ridiculous so you’d rather starve or not be able to make it to work; you simply have to accept the prices given to you.

    In a shortage however it seems a reasonable economic tactic to simply price people out of the market. This means that low income families have to take real and substantial hits to their quality of life or savings. This is something we should care about more than all the well-off people who have sufficiently large savings that paying gouged prices would not financially cripple them long term purely off the scale of harm. On the one hand we have people being long term financially crippled in order to survive, on the other we have fewer resources in the area that people might want whilst the recovery occurs. In any case, once current stockpiles run out the market incentive is created again because increased costs of acquiring goods can be passed on to consumers legitimately and not be price gouging. The only cost is a slower in pouring of goods while what we gain is the prevention of long term financial harm to the poorest (and indeed we stop our middle classes losing more money than they have to, even if they were willing to pay more). Particularly given the most disaster prone areas are also disproportionately poor for obvious reasons.

    2: Who gets the goods and why?

    (A) Random distribution

    It is to some extent random. If we recognise people as entitled to reasonable access to necessities it is unclear why this is a worse distribution than when people pay for it. To that extent it becomes a trade-off between damage to the poor who still need these things vs. the extent to which new resources can be incentivised into the area. The randomness is not in and of itself unreasonable or worse.

    (B) Investment of time

    Perhaps we might also care about the extent to which people express desire for certain goods. Why is financial capability a better decider of this than time invested in queuing to get resources? The investment of time to get them precisely maps on to the temporary nature of the crisis without causing long term financial damage to some. It seems that organisations like ambulance companies as Squatch is concerned with are likely to be able to access staff to queue outside petrol stations vs. wealthy individuals who might want to stockpile and do so without suffering substantial financial costs that are essentially exploitative.

    (C) Rationing and priority service

    Preventing gouging in conjunction with things like local rationing can ensure in any case that the spread of groups is fair. Insofar as people are unable to access resources the burden is shouldered equally. Given that the “moral status” before the hurricane is equal, it being an essentially random event, we probably ought not to allow some to bypass losing out on resources whilst ensuring that some have access to barely any or access that causes long term harm to them. Your willingness to buy at a higher price is also a willingness to deny other people things at a lower price. Note this is the difference of denying people the ability to afford the necessary amount of these resources so that wealthier individuals can purchase them at levels that they desire, rather than need. Anti-Price Gouging laws prevent this happening, especially when coupled with rationing if possible.

    (D) The Black Market

    The black market is not broken the price is raised when companies price gouge. Insofar as there is a shortage there are still people who do not have as much as they desire; it is in some’s interests to buy large amounts in order to ensure further shortage and sell on illegally more so. Yes perhaps it’s a smaller black market, but the cost of it on individuals is higher.

    3: Sufficient vs. Maximum supply

    Plausibly there are scenarios in which the profit incentive is needed to get resources in so that a basic level can be achieved for everyone. This is not an argument against price gouging laws; this is an argument against using them badly. If the disaster is that bad, fine, suspend the relevant laws. It is obviously not the case that this is universally or even often true during most disasters. There are a number of ways to solve problems of supply in conjunction with price gouging:

    A: Rationing, as already mentioned.
    B: Do not enforce price gouging when it is demonstrably new costs on the business as mentioned above.
    C: The government can subsidise companies to supply essential resources into the area to make up for the insufficient profit margins going into the area – yes this will lead to some wastage, but that wastage is shared collectively through tax meaning minimal harm on lots of people, as opposed to lots of harm to a few.

    Essentially this comes down to where should the costs lie? Given that sufficient supply can be achieved through other mechanisms that potentially cost more overall, we’re really asking who’s paying for them. Noting that if the state shoulders the cost of placing sufficient supply in the area this aggregates the cost across everyone. This can be done either through local “disaster prevention” tax or more federal level tax depending on your view on how liable people are for living in disaster zones. But taking on the lower burden of local tax (I’m lazy like that), it would mean that costs are small to everyone rather than large to a few.

    But how are these harms caused. It seems on the surface silly to deny people things they’re willing to pay for. A transaction is only between the relevant parties right? This is only the case when you do not look at the wider social effects of that decision, a few people all deciding they’re willing to pay double, triple the price for a necessity forces everyone else to pay that too. People have no choice in order to acquire those necessities they must also pay the higher price. Your decision forces bad decisions on everyone around you, when this can be prevented, it probably should, even if it does deny you that second tank of gas because there isn’t enough in the area. Considering disaster taxes are likely to minimally hit everyone, as opposed to high costs hitting the poor particularly hard, even if net financial cost is larger under government doing it due to inefficiency, standards of life are maximised.

    Conclusion

    It might well be the case that anti-price gouging laws mean that there are less resources in the area. However, without them those resources are likely to pool into comparatively wealthy hands beyond what is necessary, if only because consumption of necessities in amounts beyond what is necessary tends to be something people like doing. Unfortunately the market incentives mean that pricing some people out of the ability to buy them in order to sell to more wealthy people is more likely. These are the people least capable of weathering that hit given they will often have to delve into savings to buy necessities turning short term disaster into a long term disaster to people’s well-being.

    More resources are not necessary to weather disasters so long as sufficient resources exist. These can and ought to be maintained by states through use of subsidy and direct action, even at a loss, whilst preventing the costs scaling up in response to excess demand. Thus within this a fairer, and more even distribution of resources is achieved throughout society, the quality of life cost, as opposed to the financial, is not focussed on the already poor.
    -=]Eliotitus[=-
    "Every saint has a past and every sinner has a future"- Oscar Wilde

  4. #3
    Administrator

    Join Date
    Mar 2007
    Location
    Fairfax, VA
    Posts
    10,346
    Post Thanks / Like

    Re: "Price Gouging" actually helps people

    Elio, I’m deeply sorry it took me so long to respond. As you can tell I am also pre-occupied with work and life and it takes a while to queue up enough time to get to this. Additionally, I want to handle these responses with care to make sure the argument gets the attention it deserves. Thanks for the initial reply, I appreciate the hard work you put into it.

    As to the rebuttal. I think a lot of my objections can be summed up in the Sowellism, “then what?” I think concerns with a non-price controlled world tend to forget that the negative impacts have strongly positive reactions that occur over very short periods. Additionally, proposed solutions might seem great at first blush, but when we think about how to actually implement them and their second order effects, we see quite a bit of unintended harm created.




    Quote Originally Posted by Elio
    I’m also going to maintain that “maximum supply” possible through market incentives is not the same as the optimum situation for people in the area,
    I think Elio is using some terms here that, while quite understandable and natural, when more deeply explored reveal that economic distribution is a far more complex problem than it would seem and it is that complexity that causes the unintended consequences I highlighted in my opening position.

    Optimum Situation- I’m not sure exactly what is meant by this. By what metric are we measuring “optimum” here?

    Optimum is a subjective measure. I might find two cups of coffee optimum, you might find four cups of coffee optimum. Clearly those values are going to be individual specific, and importantly, related to how much it costs. I find two cups of coffee optimum when it only costs $1 to get them, I find one cup of coffee optimum at a $3 per cup price. Each individual has a subjective, and downward sloping demand curve based on what their personal preference for coffee is. So already we can’t really measure “optimum” unless we are willing to put it against a price or some kind of cost. Generally, we use price as a measure of that cost because it is a metric of both value of consumption and value of input. Something costs X dollars which is equivalent to the amount of value created for others in the economy to earn X dollars.

    However, that isn’t the case when we create a price control below equilibrium. In that case, we substitute time for the additional price producers aren’t allowed to charge. Time, at first blush would seem an ok metric to determine distribution. Unlike money it is distributed in an egalitarian fashion (more or less) and individuals can decide how to allocate their time to purchase the goods they want. The problem here is that time serves as a poor currency for one major reason. Unlike currency, time spent consuming is not time spent producing. It isn’t time spent caring for sick people, preparing food, clearing roads, policing neighborhoods, etc. IE “spending” in a time based currency automatically makes the economy worse off because it removes resources, perhaps the most constrained resource we have in an emergency, from the economy rather than, as with traditional currencies, transferring capital from one place to another. It would essentially be like using bread for our currency and burning it as part of the purchase.

    Each queue that people were forced to stand in to get fuel eats up the time they would be producing other things, clearing roads for example. As such we can see how creating a price control doesn’t really make the cost of fuel go lower, it simply transfers the cost from pure money to money+time, with the latter being a resource that is destroyed in the payment.


    Further, “optimum” doesn’t just refer to fuel here. When you and I consider what is the optimum level of coffee we are weighing the benefit of the next cup against the cost of that next cup. But that cost really is just a shorthand way of measuring the benefit you get from that additional cup against all the other possible options available to you. This is what economists call a “basket of goods” and “opportunity cost.”

    What you are really deciding is, do I want three cups of coffee? Or two cups of coffee and a pound of bacon? Or two cups of coffee and a loaf of bread? Or one cup of coffee, one loaf of bread, and one pound of bacon? The combinations in any real market are nearly endless.

    So when you say that the actual optimum supply might be different than the market determined supply rate, it isn’t really clear what the distinction is. The market determined supply rate is the basket of goods determined by consumers as a corporate entity. One person or a group of people might have a different preference, but I’m not sure that that is really a more desirable basket of goods than the one determined by the total of people expressing their preferences.

    The market supply rate is certainly more optimal than the overall reduced supply that goes with a price controlled scenario in which productive resources are being burned (time) to determine market distributions. From a societal point of view, the market supply rate is the rate where suppliers attempt to satisfy every last bit of desire for a good above and beyond the cost it requires to supply it because there is profit in all that supply. In that sense I would argue the two categories are the same since the market is supplying to the level that we are willing to sacrifice others goods and services to obtain the good. Perhaps we want more, but that isn’t really a valid option ever, the real question is “how much of X are we willing to forgo for some amount of Y?” And the only real way to determine that question in a social setting without being arbitrary is to have a market.

    Quote Originally Posted by Elio
    Maximum Supply-

    Plausibly there are scenarios in which the profit incentive is needed to get resources in so that a basic level can be achieved for everyone. This is not an argument against price gouging laws; this is an argument against using them badly. If the disaster is that bad, fine, suspend the relevant laws.
    Badly here seems like a pretty subjective term. How would we use them “badly” in a materially different manner than “using them at all?” All use of price control laws is bad if the premises I offer hold up, or more fundamentally if the basic laws of supply and demand hold up.

    If suspending a price control law would increase supply then why do we have it at all? The only seeming answer would be that a lower price with a shortage is more socially desirable than an initially higher price (followed by a return to a lower price) without a shortage. That doesn’t seem intuitively true.

    In the end, all price control laws (as long as they are below the equilibrium price, ie in effect) reduce supply and create shortages. If we can reduce that shortage by removing the price control law, what is the purpose of having it in the first place?


    Quote Originally Posted by Elio
    C: The government can subsidise companies to supply essential resources into the area to make up for the insufficient profit margins going into the area – yes this will lead to some wastage, but that wastage is shared collectively through tax meaning minimal harm on lots of people, as opposed to lots of harm to a few.
    This would seem to be an argument for replacing price gouging laws with direct subsidy rather than keeping price gouging laws. There are some problems with those schemes as well, but they are beyond the scope of this thread. Sufficed to say, this is a recognition that limitations on price hurt supply imports and that those prices need to rise, even if we change who exactly is paying the difference. Essentially, we could simply try the same subsidization idea without the price control laws to the same effect, actually it would probably be a better effect since consumers would determine how they spend those subsidies to relieve suffering rather than a distant regulatory body.

    There are some reasons that external subsidies are undesirable though that I mention in the OP. State or Federal level subsidies lack the local information necessary to create the optimum distribution as governed by individual indifference curves and demand preferences. An agency lacks the necessary information to determine what price they should pay for the fuel, how much more per extra hundred gallons? How much is overall needed? Is it needed more or less than any other good or service that could be purchased with that subsidy? How much more or less?

    These are all questions that a market based price change communicates inherently, but that a coordinating agency would struggle deeply with. By shifting the price change away from the people doing the consuming and towards others you hide the true cost of consumption and send incorrect price signals.

    Quote Originally Posted by Elio
    The events in question were not a fortuitous work they brought about it is them profiting off the random misfortune of others
    Well the question of whether someone should profit or not off of fortune because of their property rights isn’t quite as clear as I think this implies. After all, we wouldn’t begrudge someone getting rich because oil was found on their property, or diamonds.

    More fundamentally, remember that my point wasn’t that their motives were noble, it was that their motives were irrelevant. The profit margin they are taking, even immorally is actually prompting other, likely just as immoral people, to serve that community that has had a misfortune. That is the key point. The price increase, even if opportunistic, serves to prioritize consumption towards the most efficient and valuable uses in an emergency along with increasing supply via price signaling.

    So even if they are benefiting off an unhappy happenstance, it doesn’t matter because their benefit is still aligned with the needs of the consumers who have had this misfortune fall upon them.

    Quote Originally Posted by Elio
    Deliberately pricing people out of food and the ability to travel to work (gas) in order to maximise your personal gain seems intuitively immoral.
    Well I don’t think they are deliberately pricing people out of food or gas, they are simply maximizing what they are going to get for the good they are providing (people are left out of this market whether or not they increase the price, right?). Certainly no more than all retailers are deliberately pricing people out of things now, since there are clearly people who would buy more food or gas if it were cheaper. More to the point, they aren’t really determining that there will be people who go without here, they are simply saying, “do I sell to person A and get $5 or person B and get $10.” That is the option they have here, not to say “I’ll sell to both person A and B.”

    But lets say they are immoral, Adam Smith wrote a great piece of the morality of this very scenario in The Law of Moral Sentiments and I largely agree with him. Now, that said, lets concede it is immoral. Lets concede these dudes are dicks. That isn’t the basis for my defense, my basis is whether or not removing price control laws benefit or harm consumers, regardless of whether or not they also benefit jerks.

    Quote Originally Posted by Elio
    I do not, and probably will not contest that allowing price gouging would probably mean more resources in the area. The issue is that those receiving them are also those most able to weather long term harm to their finances. If we are talking about necessities there is no reasonable or fair choice “not to buy”.
    I believe this argument largely cedes the point I was making, and that if we follow the consequences of that point through we arrive at a pretty strong argument against price control laws. If we start with the premise that the increased price will drive additional supply to the area to capture the extra profit we quickly realize that the increased supply, and therefore competition, will drive the price back down such that sellers won’t be able to gain much more than the additional cost of shipping the goods in.

    That means that while the early consumers after a disaster might have to pay a higher price (which makes sense, remember a positive benefit from the price increase is that it prioritizes consumption by those with the most productive use), the price drops to only a bit higher than it was pre-disaster because supplies increase as well so that those who cannot afford to be early purchasers can still get fuel and food.

    In fact, that is the amazing takeaway from this kind of response, that while those with the most productive uses for the fuel get it first and pay a premium for that privilege, the rest of the consumers also get the fuel.

    Compare that to a price control system as I did in the OP where maybe a few of those consumers get the fuel cheaper than they would have in the situation I describe here, but the vast majority of them get nothing. And since the supply is limited via price controls, they get nothing until the entire economy returns to a normal, pre-disaster equilibrium.

    The non-price control scenario is clearly the better one for consumers, even those of limited means as they are able to get the goods they want, even if they aren’t first in line rather than simply not being able to get them at any price.

    Now an objection might be brought over the timeliness of these extra supplies. Some part of that depends on their overall availability and supply rates in nearby areas. But the vast majority of what determines how long it takes for the extra supplies to roll in is determined by whether or not these kinds of price control laws exist. If they do not exist, enterprising opportunists can prepare by stockpiling fuel or food in mobile trucks just outside the disaster area, buying it up from the surrounding areas and signaling producers to produce more. They will work to get to the area as fast as possible in the hopes of capturing the profit from that initial price spike, thereby driving it down all the quicker. Their ability to plan on this (just as in the similar scenario described in the OP where stores could plan on stockpiling because the price would rise) actually decreases the disruption, shortens delays, and means that those people who would be ruined by exorbitant prices don’t have long to wait for a return to tolerable levels.

    Quote Originally Posted by Elio
    In a shortage however it seems a reasonable economic tactic to simply price people out of the market.
    I should point out here that people are always priced out of a market. A market isn’t about inclusion, it is about allocating goods to their most efficient uses. I am priced out the market for a third cup of coffee at $3.50 a cup because of decreasing marginal return and the desire to purchase other goods. All price levels above $0 price someone out of a market. This is true because we are always in a shortage. There are never enough goods and services to fill everyone’s wants, we have prices as a recognition of that fact. All markets are always in shortage, disasters are just an extreme version of that reality. So it seems odd to argue the system works to maximize efficient use of resources in one instance, but not in another.

    Quote Originally Posted by Elio
    The randomness is not in and of itself unreasonable or worse.
    I would argue that it is. Essentially a random distribution is like airdropping resources onto a community with no thought to who might need them, what they might do with them, etc.

    Essentially, a system that transfers goods and services via random selection simply mandates the transfer of the benefit away from producers, who worked hard to make or buy the good and bring it to the consumer and to the person randomly selected, who either gets it much cheaper than they are willing to purchase it at or who can resell it and capture the benefit legally denied the person who produced the good.


    Quote Originally Posted by elio
    (B) Investment of time

    …Why is financial capability a better decider of this than time invested in queuing to get resources?
    I think I offered several reasons for the reader to review in the OP. Time does not consider the relative use that any person could put the resource to, it only considers those who do not have a more productive use of their time than waiting.

    In an emergency, time is critical, the time spent waiting in line is time not clearing roads, not repairing damage, not attempting to get things back to normal.

    Time is consumed in waiting, not reallocated like currency. So using it as a currency only decreases our overall supply. It would be like burning the money after purchasing the fuel.


    Quote Originally Posted by Elio
    (C) Rationing and priority service

    Preventing gouging in conjunction with things like local rationing can ensure in any case that the spread of groups is fair.
    Rationing was dealt with a bit in the OP as well, but I’ll expand on it a bit here. The word “fair” here is used as a kind of objective of economic distribution. But I would ask what distribution is “fair?” Who determines what is fair? Who is the arbiter and by what measure do they decide whether a healthy 30 year old should get the same amount of fuel as someone who is 90 and might have health issues? What about the difference between, say someone in a wheel chair and someone with a CPAP?

    The central problem in economics is how resources are distributed and it is far, far more complex than is realized at first glance. Hayek’s nobel speech on the pretense of knowledge concerns just this issue. Presumably, we would have some agency or group deciding how to distribute resources. Some group like FEMA. This would involve two elements.

    They would need to confiscate the resources. Perhaps not physically remove them to a compound or warehouse (though historically this is what FEMA has done), but sequester their sale to ensure they can accurately track how they are distributed. As Elio appropriately notes, there are definitely property right issues with that idea. Setting aside that issue, let’s deal with a practical implication. Let’s say you are Costco and you have a lot of generators. You know that the government is going to seize your generators, or at least tell you who you have to sell them to and at how much. Why would you import more generators ahead of a storm? Or even more likely, why wouldn’t you ship out the ones you have to somewhere else without those restrictions? We’ve seen this kind of capital flight before when price control and rationing came into effect and we should expect to see it in our city as well. A decrease in available supplies running up to a disaster and a significant delay in replenishing supplies until the situation has “normalized” and the agency has stopped rationing is an outcome observed both in Katrina and in Sandy as normalization took much longer than expected and supplies were low, even following the restoration of normal supply routes.

    This FEMAesque organization would also need to develop some kind of metric for distribution. This is the heart of the objection I made above. How would they decide who needs the goods the most? What is fair? How would they collect that information, process it? How would they stop fraud, waste, and abuse? All of that would require an immensely powerful and well staffed agency. Even presuming that there are measures by which we can objectively measure “fairness” (and as I’ve indicated earlier, their aren’t if we acknowledge that value is subjective), it would take hundreds if not thousands of people to make those decisions for even a single good in a major city, let alone the nearly infinite number of combinations of goods. Do we favor heating oil or fuel oil? How much fuel oil for every generator? How much meat? Lettuce? Butter? Milk? What are the exact proportions of those and who gets what? What if large numbers of the people prefer orange juice in this situation over milk, how do we determine who they are, and how to get that to them? Etc, etc.

    I’m not posing these questions to sharpshoot my opponent, but rather to simply point out that too often we treat economic distribution as if it were a logistical problem (which are hard enough in their own right), when in reality it is a much, much more difficult problem that deals with subjective value, indifference curves, and marginal consumption rates for thousands of individuals multiplied by thousands of possible goods. To put it in perspective, even a very simple economic metric would have a number of economic decisions something like:
    Number of purchasers * (number of different goods!/(purchasing power!(number of different goods-purchasing power)!) IE the binomial coefficient.
    So in a city of 10,000 purchasers, each capable of buying something like 50 goods in a restricted market of only 10,000 different goods (to put that in perspective the average grocery store has something like 15,000 to 60,000 different SKUs www.fmi.org/research-resources/supermarket-facts hardware stores can be even larger, and we aren’t even counting the hundreds of other store types) that would mean we have something like 2.91... 10^139 separate, subjective economic decisions. To put that in perspective, we are talking about 29,082,789,093,891,422,718,472,303,407,001,941,417 ,927,753,521,756,233,286,897,551,427,652,003,272,5 52,737,744,491,372,559,738,575,459,886,808,833,540 ,701,066,552,587,903,982,048,000,000 possible economic choices that need to be adjudicated. That is pretty overwhelming for any agency or group and while we could limit that by only handling “vitals” (assuming we can agree on a definition of that that is), that only highlights the subjective nature of the problem.

    Which goods are vital? How much of that vital good must be supplied before it can also be considered luxury? Etc.

    And all of these are subjective choices. And of course, we aren’t even considering the completing claims between individuals. Does A get more than B? Less? Why? Even conservatively we could predict conflicts that make that exponent rise to the 150 range.

    The tempting response is to appeal to computers. After all they make complex decisions all the time. And they are great at making objective decisions. Is A>B? What value of A maximizes the output of a linear equation? But these aren’t objective decisions, they are subjective ones. Does John like two apples more than three oranges? What about four oranges? Etc. The only way a computer could handle this is if we had the indifference curve for each buyer in our market for all possible sets of goods. That is a monumental data pull and would take up so much time to develop as to essentially end economic activity in the meantime. Every buyer would need to fill out hundreds of comparison forms or we would have to rely on past data that doesn’t apply to an emergency. Either way, we are talking about a degraded function that would absorb tremendous resources for a sub-optimum result.

    When we compare that with the alternative I laid out above of allowing people to self prioritize and increased supply, it doesn’t seem like a very appealing alternative. We can, at the very least, agree that while certainly FEMA could ensure people have enough food to eat, the types of food, distribution of food and other concerns (allergies, etc) are going to be sub-optimal when compared to a market determined (ie everyone makes their own preferential choices) allocation.


    Quote Originally Posted by Elio
    (D) The Black Market

    The black market is not broken the price is raised when companies price gouge. Insofar as there is a shortage there are still people who do not have as much as they desire; it is in some’s interests to buy large amounts in order to ensure further shortage and sell on illegally more so.
    I think this slightly misunderstands the argument being made. It isn’t simply that the price is raised, it is that the price reflects the market clearance price. IE that the price you can buy a good legally is the same as the price that would sell out the available supply with no one extra wanting to purchase at that price.

    By allowing the market price to meet the clearance price you remove the possibility of a black market since the black market could only sell the goods at the same price with the added cost of risk (since it is a risky transaction) and there is no one left willing to buy the same good at the higher price. Hence, no market.

    So what is really going on here mechanically?

    Two things. First, the normal supply that is being sold at the price control rate tends to end up in the hands of black marketers (who can afford to hire someone to wait in line since they are making a huge arbitrage (riskless) profit). So that supply ends up just being resold at a higher price anyway, with our price control law seeming to be completely ineffective. All it would appear the law has done is to guarantee the black marketeers an arbitrage profit at the expense of our lawful shop owners.

    Second, remember all that extra supply I mentioned above that would flow into the city because of the increased prices? Some of it still flows into the city via slower means (since it requires being discrete) and at a higher price than would have occurred without a price control law (since there is a risk premium for the black market supply chain and it usually costs more to ship something covertly). That supply is likely limited due to the limitation imposed by those willing to forgo legal prohibition to make a profit and at a higher price than would have existed otherwise.

    So our black market has three primary effects.

    1) Lower supply than an open market (including the supply captured that otherwise would have gone to normal consumers).
    2) Higher price than an open market.
    3) Increased risk to buyers associated with illegal activity.
    Compare that to a scenario without a price control law where prices are lower, supply is greater and consumers are afforded normal fraud protections.

    Quote Originally Posted by Elio

    Conclusion

    It might well be the case that anti-price gouging laws mean that there are less resources in the area. However, without them those resources are likely to pool into comparatively wealthy hands beyond what is necessary…
    I think the error involved in this conclusion is the assumption seemingly presented that economies are static piles of goods to be distributed amongst a static group of people with fixed desires. Rather, they are far more complex, with shifting desires and trade-offs, variable quantities for supply, and a temporal aspect as people react to decisions made by other people.

    For example, resources wouldn’t “pool” in the non-price gouging scenario any more than they would “pool” in the price gouging scenario for those who are first in line. The fact that some would get the initial supply while others wouldn’t isn’t really pooling, it is prioritization. There are two differences in the scenarios worth considering.

    The first is that in a price-controlled scenario, the prioritization occurs via chance, or more precisely, goods are prioritized towards people with the least opportunity cost for their time. IE people who can afford to wait in line. In the non-price controlled environment people self-prioritize based on their willingness to forgo other goods and services in preference for the ones they want to purchase. They also self-prioritize based on their willingness to delay consumption, which brings me to my second point.

    These goods are not static piles we are determining how to distribute. In the non-price controlled environment the stockpile of goods is quickly added too because of the price signal, bringing down prices and increasing the supply available to the community. Whereas in a price controlled environment goods are slow to follow demand and the people away from the front of the line are essentially out of luck.


    I would like to conclude this rebuttal with a short contrasting vision of what life is like in the two environments.


    With price gouging laws
    As the storm approaches, the local gas station quickly runs out of fuel as those first drive to it stockpile, knowing that fuel will be scarce, their neighbors might be willing to buy it from them at a higher price and that resupply of fuel will take a week or two as agencies stand up and try to reestablish relief supplies.

    After the storm the community waits perhaps as long as two weeks for new fuel shipments to arrive as FEMA activates its command post, gets funding authorization, pools supplies from, usually, national fuel resources (which also requires authorization) and then establishes distribution points. Those points prioritize distribution both to first responders and to any other government vehicle (Sandy as an example here).

    Lines are long at the relief points and fuel runs out quickly. Re-sale points for the fuel open up only a few blocks away at much higher prices. FEMA has introduced rations for fuel which allocate a set amount of gas to each person, not everyone is able to redeem these rations and so fuel ends up sitting in trucks in some areas while running out almost immediately in others. Some people with little need for the fuel and time on their hands due to the disaster show up early and get their ration either for marginal use (defined as something they would forgo if it cost more) or resale. Those with more critical roles in the recovery find themselves unable to get fuel as the lines are too long or fuel has run out while they are occupied clearing roads or laying line or fixing storm damaged houses.

    Because of the increased cost to ship fuel in due to blocked roads and FEMAs pooling of local resources, gas stations maintain or drop their fuel purchases in the days following the storm and don’t resume normal activities until weeks after the storm when FEMA ceases operation.

    In short, gas is available, if you know a guy and are willing to pay a high price, but otherwise, supplies are scarce, distributed haphazardly and won’t be normally available for weeks to months following the disaster.


    Non-price controlled

    Lets compare that with the response in a non-price controlled environment.

    Gas stations stock up on fuel leading up to a disaster to capture the profit arising from increased prices. Consumer stockpiling is much lower as increased supplies dull concern and the likelihood of quick replenishment dampens the need to horde. Outside the likely affected area, entrepreneurs rent fuel trucks (or simply lots of fuel cans) and seek out the least expensive gas areas to stock up and be ready to resupply those who need fuel following the storm. Being clever, they know that roads will be blocked so they also get their chain saws and tow chains out of the shed to help them clear roads to get back into the city (incidentally helping out movement for everyone else as well).

    Immediately following the storm prices spike. In some cases fuel hits $20/gallon. They are not as high as expected because increased supplies were brought into the city by gas retailers in expectation of increased prices, which limits their ability to raise prices. Many poorer people select out of the market, preferring to stay at home and light candles to driving and running a generator. Some stores that need the fuel to continue operating fork over the price in order to continue operations. It is expensive, but it is still less expensive than not buying the fuel. One wealthy person spends a good deal of money keeping himself in comfort. Incidentally, this happened in both situations, but here he makes the gas station owner a large profit where before he bought off a series of local resalers and via the “gray” market.

    Our entrepreneurs hear about the $20/gallon price and speed to the city, clearing roads as they go. When they show up they set up shop and sell gas in the areas with the longest lines, or the most complaints about shortages. They also find they aren’t the only ones with the idea, and additional people, spurred on by the prices and the now open roads are short behind them. Prices drop to $15/gallon because of competition. Some middle class citizens now decide to purchase some fuel for their generators, while some (and most lower income citizens) still prefer keeping their life savings and using candles for the night.

    By the next morning additional supplies have shown up. Our gas retailer has pre-ordered fuel to hopefully capture the increased profit and that has also arrived. Fuel is still more expensive than it was pre-storm ($3.00/gallon), but only by the cost of shipping at this point ($3.50/gallon) as competition heats up. Some entrepreneurs drop their prices below gas station prices in order to clear inventory so that they can get the trucks back before an additional rental fee is due. Virtually anyone who wants to purchase fuel by this point is able to do so as the prices are only marginally more expensive than they were pre-storm.

    This has only taken about 48 hours (it doesn’t take long to ship gas from non-affected areas). Some poorer people did have to delay their consumption. Most people delayed or decreased their consumption initially as well. However, after only two days everyone who wants it has access to fuel at near traditional market rates (cost of production for gas usually) rather than some people having fuel and many people going without for weeks in the alternative. Those who were most willing to forgo its use simply waited for a day or two rather than standing in long lines. Additional benefits from road clearance and other externalities has also made recovery faster than it would have been otherwise.

    As I pointed out in the OP, none of this is theoretical either. Both scenarios have played out historically. Price control laws hurt tens of thousands of people following Sandy and Katrina as relief supplies were delayed our simply never came. In the example cited by the economist I quoted, ice showed up in about 12 hours after a hurricane the delay primarily being the time it took to clear the roads, which were then promptly used by emergency vehicles and locals. The only difference in the latter example is that the ice supply quickly stopped as police arrested the men and the ice was confiscated, never to be seen again.

    The real moral question at the heart of this debate is whether we, as a society, prefer that suffering is greater for every individual, as long as suffering is equal for every individual. Or whether we are ok with unequal suffering as long as the suffering for each individual is decreased.
    "Suffering lies not with inequality, but with dependence." -Voltaire
    "Fallacies do not cease to be fallacies because they become fashions. -G.K. Chesterton
    Also, if you think I've overlooked your post please shoot me a PM, I'm not intentionally ignoring you.


 

 

Similar Threads

  1. FD Discussion: "Price Gouging" actually helps people
    By Squatch347 in forum Formal Debate Forum
    Replies: 9
    Last Post: September 23rd, 2014, 06:51 AM
  2. the price is right
    By daveId in forum General Debate
    Replies: 22
    Last Post: December 27th, 2010, 09:37 PM
  3. Should china helps pak in building its nuke capacity?
    By himanshu10140 in forum Current Events
    Replies: 5
    Last Post: June 5th, 2010, 07:15 PM
  4. Should china helps pak in building its nuke capacity?
    By himanshu10140 in forum ODN Polls
    Replies: 0
    Last Post: May 19th, 2010, 12:18 AM
  5. Replies: 6
    Last Post: February 7th, 2009, 07:10 PM

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •