A Surplus of Articles on Price Gouging
I pile on. However, all modesty aside, I think I collected everybody’s good points into a one-stop-shop for you and your normal co-workers/relatives. I also hit an issue related to philanthropy that many standard “economistic” defenses of price gouging miss. Two excerpts:
In the path of an incoming storm, where thousands of people want to evacuate the coast, depending on refinery interruptions and other bottlenecks, it’s possible that some local stations will run out of gas if they don’t raise their prices significantly. The people who are lucky enough to get to the stations first will naturally fill the tank up, before getting on the interstate to get out of Dodge. Then the unlucky followers will see the gas station is empty, and may end up stalling on the interstate. The authorities then have a problem of dealing with stranded motorists who are stuck not because of flooding, but because they ran out of fuel during their escape.
In contrast, if the few relevant station owners charge $15 per gallon, then people who had (say) a half-tank in their car when the storm hit, will say, “That’s outrageous!” and get back on the highway, to see if prices are any better in another 50 miles. At a price of $15, only people who are about to run out of gas will buy any, and even they will only purchase enough to give them some breathing room. They too will probably take their chances and hope that gas is cheaper if they move away from the storm.
and
Suppose instead, however, that the owner charges the full $14, but then donates his $1,000 windfall to a local relief effort that is handing out free packets of food and dry clothes to families who were flooded out of their homes and have literally nothing (including wallets). Or to make the point even more clearly, suppose he donates the $1,000 windfall to a local organization that uses the money to buy bottled water and hand it out to desperate people?
Once we go down this path, we see that the insistence on charging only $4 for the cases of water really just means that our hypothetical store owner is concentrating his $1,000 worth of charity on the particular Houstonians who happen to walk into his store and pull out their credit card to make a big purchase. What are the odds that these people are the ones in Houston most in need of his implicit $1,000 charitable donation that day?
I find your example a bit confusing and a very large amount of market failure.
If the gas station owner maximizes his revenue, he will be putting his “windfall” into what he knows best: running a gas station, i.e. determining the best way to get gas to his customers. By following some sort of collectivist morality he fails to get his tiny piece of the economy recovering. Once again the warm fuzzies defeat a functioning free market.
I think the second example was a store owner selling bottled water. If he chooses to raise as much revenue for charity in this way then hundreds will benefit from clean water. If he chooses to forego the benefit, only those that walk into his store benefit from his “charity” of not charging the new market rate. It seems a good way to illustrate the point.
No Khodge you totally misunderstood what I was saying. And even if you were right, it wouldn’t be “market failure” unless you are using that term in your own special way.
Khodge just to be clearer: If I wrote something arguing, “The government shouldn’t interfere with market prices, but as a matter of personal morality, I think rich people should donate to charity,” would you think I just ruined the case for capitalism?
(1) I’m never opposed to making up my own special terms (but it did not serve me well in economic classes).
(2) Let me offer a more compelling example: There is a furniture store that made the news for opening up his store to displaced flood victims. He got a ton of free press. That is what furniture salesmen do and because you can’t follow free money, no one complains about price gouging. (Remember the last presidential election?)
Note in your example that you did not say the business owner was wealthy and I specifically had to use the word “revenue” rather than “profit.” I cannot even begin to guess what the business owner lost in the flood (picture trying to get water out of the pumps or simply lost days of sales).
In reading your post, I am only seeing windfall revenue (not profit) that a business owner is misallocating that ought to go to putting a business in order. Everybody is better off if he returns to normal quickly and addresses his ill-gotten gains afterwards.
In other words, do your work first, caterwaul when people have time to listen.
Khodge,
In the article I am clearly talking about a businessperson who enjoys a pure gain. His neighbors are suffering but he is going to profit. I used these terms several times, and I even specified that he didn’t load up on the inventory beforehand (i.e. he didn’t take special measures as the storm approached).
Sure, if you want to talk about a different business owner who has taken on water damage, go ahead; you won’t get any argument from me. But in my discussion, I am clearly isolating the “worst case scenario” of someone who is enjoying a pure windfall gain through no foresight of his own, but just dumb luck. And I’m saying even in that type of scenario, he can help more people by charging the market price and then donating the windfall to charity.
You wrote: In reading your post, I am only seeing windfall revenue (not profit) that a business owner is misallocating that ought to go to putting a business in order.
Well, that’s not what I was describing. And I don’t think I wrote in a confusing way; I am very surprised you didn’t realize I was talking about a business owner who is going to benefit from the storm in the eyes of the critics. They aren’t talking about somebody who got smashed himself.
http://www.zerohedge.com/news/2017-09-07/3-good-things-about-price-gouging
The comments are kind of interesting (compared to regular ZH comments). Some people get it, other people are determined to find reasons not to get it.
NOTE: Whenever visiting ZH remember to disable Javascript and avoid their obnoxious pop-ups.
It doesn’t surprise me that people don’t get it intuitively, but it is a bit surprising how few get it even after having it explained to them. I try to explain it to them and share them articles explaining it, but once I get tired of hearing how I’m evil and only care about rich people, I change tactics. That’s when I take their moral high ground by asking them if businesses should be forced to give everything away for free. When they inevitably say of course not, and that it is fine to charge the regular price, I ask why they hate poor people who can’t afford the regular price. Why do they want them to die just because they don’t have enough money to pay regular prices. I’ve yet to run into someone who knows how to handle it once they lose what they believe to be the moral high ground.
I use a similar tactic when I talk with conservatives. My ex-girlfriend’s dad once called me a socialist. I can’t remember why exactly, but it was probably me telling him I disliked some conservative politician. So I said, “Socialist? I’m so much in favor of the free market that I’d privatize everything. For example, I’d privatize the police tomorrow if I could.” He responded, “Well, that’s taking it too far.” So I finished with “Oh, I see. So you’re saying you have a bit of socialist in you.”
To my mind, people don’t get it because they don’t *want* to get it. There’s a fundamental human drive to find a villain to blame for misfortunes, and those who benefit from the misfortunes are the obvious target. People hunting for blame targets aren’t interested in forming rational understandings of market forces.
Perhaps a solution that would help to satisfy most is to fix the price for the first few units. You can buy 2 bottles of water at the old price but if you want more you pay more. Would be difficult to put into practice perhaps, but in principle would this keep everyone reasonably happy? Or would it just get everyone even more pissed off?
What are the real downsides to price gouging? One that I can identify is that in times of disasters it important for everybody to pull together and set a good example to encourage everyone else to do likewise. Cooperation is always important but in a crisis is becomes life or death. People who price gouge are doing the opposite, or are seen to be doing the opposite, and can be a divisive force. This is not necessarily trivial problem. Ask a general if moral is a significant factor in battle.
If everyone knew the proceeds were going to the water distribution charity I suspect that would go a long way to ameliorate the problem. However, it would also remove the incentive for people to bring supplies into the area. Perhaps this is what Khodge was getting at with defeating the functioning of a free market.
It is very hard to quantify this downside to know if it is significant compared to the benefits of increased supply and avoidance of hoarding.
See what I mean in my comment below? Even absurd, stale stock is rushed into print to try to meet the demand. Only in times of extreme twaddle shortage could you peddle the idea that a functioning market is the opposite of co-operation.
Craw, I think I know what you mean, but I think you have missed the point. I am thinking of cooperation in the terms of prisoner’s dilemma. Noncooperation is always the rational option in that game, but ends up with sub-optimal outcomes. The market does not require cooperation, only self interest. Isn’t that the elegance of the market? The best outcomes are obtained by people pursuing their preferences. In the crisis situation this is summed up perfectly by all the market reasons for allowing it. The shop owners’ preferences for maximising profit also maximises supply and ensures distribution to more people. All good things.
The downside is because preferences are not a given, but they emerge from our situations. The example of price gouging changes people’s preferences so they behave in a less cooperative way.
Going back to the military, it seems rational for an individual to run away from a musket line in the face of a cavalry charge because their contribution is very small and as long as everyone else stays put their chances of survival will be maximised. However, we know that one person running away makes the chances of others running away much greater. The soldier must consider the effect his behavior has on others to arrive at the real rational option, which is to hold fast to maximise chances of surviving.
Since we are by definition talking about disaster and crisis, this sort of analysis also applies in this situation, although it is not quite as stark.
That’s such a good idea, it should be mandatory.
I am unsure of your reason for making this comment. I am almost sure you do not think it should be mandatory, so I detect sarcasm.
Can you elucidate?
It’s an oblique reference to this “meme” cartoon:
https://i2.wp.com/globalwealthprotection.com/wp-content/uploads/2013/05/Statism-Ideas-So-Good-Theyre-Mandatory.jpg?resize=300%2C200&ssl=1
But just because it’s you Harold I will continue the hand waving :
A genuinely good idea tends to attract followers even without government enforcement. Some would say that’s better because it allows people the opportunity to be good by voluntarily doing the right thing (without choice there is no good and evil, there is only obedience). This is where the concept of “setting a good example comes from”.
On the other hand, a genuinely bad idea probably should not be backed up by SWAT teams and jackboots. We are better off to choose to avoid this bad idea.
Thus, in both situations, government enforcement doesn’t help.
Hey! That’s logic.
I did not say there should be enforcement. I was only identifying a downside. What one does about it is another matter.
It struck me that nearly all the arguments against price gouging were misplaced. I was seeking a downside that might not be. Have I found one?
Fair enough you didn’t demand enforcement on that particular issue. Mind you a lot of people do start looking at the whole “price gouging” question from a perspective of big government crackdowns. We can find plenty of cases were governments do enforce anti-gauging laws.
I think Tom and Bob have both covered the idea of long term reputation and if you own a store in some local area then you will probably not make enough to retire on in a single flood, so you will need to keep trading with the same people after the flood.
Thus you have a sort of decentralized and voluntary type of enforcement… without the use of actual threats of violence. People can simply not use your store if you have earned a poor reputation.
In the case of organized boycotts, it’s kind of borderline whether that is people voluntarily choosing to not trade, or whether those people are being leaned on and put under pressure. Some people who are organizing those boycotts can get very pushy.
Designing a workable and fair reputation system is difficult but if you ignore some ugly details, at least approximate systems have been around for a long time. The whole concept of a trademark for example is based around the idea of building and protecting a reputation. It mostly works, probably it works better than some bureaucratic committee attempting to do that same job.
Apparently everyone wants to buy articles on price gouging. The most absurd codswallop gets printed, and sells. Unsold inventory is non existent. Don’t we seem to technically have a shortage of articles on price gouging?