by By Peter Dorman (originally published at Econospeak) Price Gouging Whenever there’s a natural disaster, a famine or some other such crisis, people zero in on price gouging. Are grain merchants jacking up prices to take advantage of a food shortage? What about airlines raising fares to cash in on desperate attempts to flee an impending hurricane, or stores that double or triple the price on bottled water? And generators that suddenly only the rich can afford? Most think this type of exploitation is unjust and even wicked, but Econ 101 says the opposite: it’s a rational, socially desirably market response to a change in supply and demand. Higher prices for goods made scarce and valuable by a disaster encourage both more provision and greater care in
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by Peter Dorman (originally published at Econospeak)
Price Gouging
Whenever there’s a natural disaster, a famine or some other such crisis, people zero in on price gouging. Are grain merchants jacking up prices to take advantage of a food shortage? What about airlines raising fares to cash in on desperate attempts to flee an impending hurricane, or stores that double or triple the price on bottled water? And generators that suddenly only the rich can afford?
Most think this type of exploitation is unjust and even wicked, but Econ 101 says the opposite: it’s a rational, socially desirably market response to a change in supply and demand. Higher prices for goods made scarce and valuable by a disaster encourage both more provision and greater care in use, exactly what you would want in such a situation. For details, see the writeup in today’s New York Times.
According to the Times, the main flaw in the free market argument is that it allows the poor to be completely priced out. This is an application of the argument, made by many social theorists, that distinguishes between essential goods, which should be rationed more or less equally among all, and inessentials, which can be left to the market. There’s a lot to be said in its favor, and I won’t dispute it.
But the Times and most commentators miss a second point, which is about the same issue of social utility as the case for markets. Societies depend on a general willingness to share, volunteer and reciprocate, especially in desperate times. When a hurricane or earthquake strikes, or when war or some other spasm of human destructiveness occurs, we depend on friends and strangers to help locate survivors, pick up the rubble, share their homes and meals and generally pitch in. There have been a number of stories, for instance, about ordinary people from other parts of the country who, hearing about Harvey’s devastation of Houston, made their way their to help out however they could. Most of us won’t drop everything and head to Texas, but it’s safe to say that Houston won’t recover, or at least not so much or so quickly, unless hundreds of thousands in Texas and elsewhere lend a hand.
The problem with price gouging is that it undermines the spirit of voluntary provision. Who will make a personal sacrifice to help the community rebuild if those with the most means are using disaster as a golden profit opportunity? Pecuniary incentives crowd out intrinsic ones. This is true at the individual level and also socially. A society in which the market performs rationally but spontaneous cooperation is snuffed out is cold, cruel and ultimately not rational at all.
Disaster relief for sale is not so different from love for sale.