Thursday, September 08, 2005

Price Gouging or Market Clearing?

While quite a few people (including liberal blogger Mark Kleiman have posted defenses of so-called price gouging and noted their opposition to government price caps, Dave Hoffman's argument seems to blow them out of the water. Actually, he makes two arguments, but I like the second one best:
In civil emergencies, markets don't work to clear information in rational ways. Even high prices will not serve to reduce demand for, say, water and gasoline, over the short term if folks think their lives are going to depend on having such commodities nearby. Price gouging regulations do two things to reduce panic and regulate demand. First, they increase trust in market transactions (an SEC-like role) and thus will act to reduce "panic demand" in emergencies without increasing price. Second, the regulations - when publicized appropriately - have the same information forcing effect as higher prices themselves, teaching people that there are supply interruptions and they should change their use patterns until conditions improve. In both ways, price gouging regulations use norms and soft-economics to accomplish market stabilization in a more satisfactory way than the market would, if left to its own devices.

I know zero about economics, so this is an entirely uninformed opinion. But there is something intuitively appealing about the notion that people behave irrationally in emergencies, and thus normal market forces don't work the way we want them to work. It seems to me that letting gas prices rise in the wake of a crisis could as easily cause a run-panic, pushing prices even higher, as it would reduce demand and let prices fall back to normal.

1 comment:

Isaac said...

I agree that this is intuitively appealing, but I still think its wrong. I posted this at PrawfBlawg:

What you are leaving out is that nothing you do in this emergency situation with respect to price changes the fundamental condition of scarcity of water and gas. So you are confronted with a problem: given an (insufficient) amount of a commodity, how am I to distribute it? Letting prices rise will prevent some people from getting supplies of that good (and it will be poor people who are screwed), but then they will be forced to look for close substitutes or alternative means to the same end. This effectively increases the amount of gas and water available. If you simply fix prices, people devote their energy to being first in line, but this doesn't actually change anything about the fact that you have a shortage. So the shortage will remain. On net, then, you have less of the good if you fix prices than if you let prices float.

You have a dramatic shortage and you want people's creative energy devoted to finding alternative sources rather than getting in line first.