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.

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