(Why) is “price gouging” the name of a problem?

I thought we believed in free markets. Why is the period after a hurricane an exception?

Florida authorities report a wave of price gouging in the wake of Hurricane Charley, and promise to enforce Florida’s anti-gouging laws.

Some of this is fairly straightfoward enforcement against bait-and-switch and false advertising, and raises no conceptual problems.

But from the viewpoint of orthodox economic analysis it’s hard to explain exactly why it’s wrong, in the wake of a disaster, for someone who has a limited amount of ice or gasoline or tarpaper to sell, and a large number of customers for it, to charge whatever the market will bear.

The textbook analysis has a lot to be said for it: not only does the higher price encourage people to use as little as they can of the temporarily scarce good and encourage potential suppiers to spend what they need to spend in order to rush new supplies to the market, the prospect of higher prices encourages stockpiling in advance of potential disasters by merchants and consumers alike. (Since no one can cause a hurricane, there’s no reason to fear perverse incentives.)

The case seems even stronger for services: if someone has the equipment and the skill to take fallen trees off the houses they’ve fallen across, we want that person out there working as many hours as possible, and being able to charge a high price will encourage that.

Of course it’s natural for people to resent being ripped off, and they’re well within their rights to refuse to pay the higher prices even if refusing to pay isn’t the best move for them in purely material terms. But why should merchants who charge scarcity prices face legal repercussions?

As far as I can tell, none of the politicians and pundits who prech the gospel of the market is rushing to the defense of price-gougers. There are significant practical differences, but morally there’s not much difference between anti-gouging laws and, for example, rent control.

It’s not hard to come up with practical reasons to dislike price-gouging. Disasters call for, and in healthy societies elicit, altruism and solidarity, and price-gouging as a practice probably does something to suppress those valuable reactions. But some of that analysis also applies to other sorts of economic regulation that free-marketers are unequivocal in denouncing.

I can see both sides of the argument; my point here isn’t that anti-gouging laws are wrong, but that they ought to be controversial in a way they currently are not, at least among those who consider themselves principled advocates of laisser-faire.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com

One thought on “(Why) is “price gouging” the name of a problem?”

  1. Lack of Original Thought

    Jeff Jacoby has an interesting column in today's Boston Globe about price gouging and why we shouldn't discourage it.
    MAGINE a system that could instantly respond to a calamity like Hurricane

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