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The Political Economy of Wishful Thinking

Privatizing Keynes... I Wish Tiebout Could See This...
by Michael Munger
Guest Blogger
States have some ridiculous laws on the books, but some of the most interesting, popular, and ridiculous are those on price regulation. At bottom, they come down to this: Wouldn't it be better if there were no scarcity? Maybe (I'm not convinced), but why stop there? Gravity and friction both bug me, too.

Today Florida opened a "report your neighbor" hot line, for price gougers. But Anti-gouging laws reduce quantities available in emergencies, such as hurricanes or other natural disasters. (My own state, NC, has an egregious version). If there is not enough ice or batteries at high prices, how will there be enough at artificially low prices? (Walter Williams, John Hood, and Arnold Kling, on same) (see, for a little different view, Tyler Cowen)

Anti-scalping laws have created an entire industry focused on the secondary black market.

Why can't we just all get along—with markets?

Comments and Sharing

CATEGORIES: Price Controls

COMMENTS (7 to date)
Mcwop writes:

Add health insurance mandates implemented by the states, which increase the cost of health insurance.

Lawrance George Lux writes:

I will provide the exact same argument as I did in Arnold's thread:
There is no increased Production in the Short-run. Higher pricing during emergencies suppose a spreading base of Supply, higher prices inducing more Suppliers to enter into Overtime Production to make up Storage losses. The added Price pays for the Overtime costs, and anger of established Customers over shortages of their own supply. This is the theortical argument for Price-gouging during emergencies.

Reality states Transportation and Overtime costs are over-compensated; still, there is the need to induce Suppliers to supply, bearing the added costs. Federal regulation could limit Price rises to Fifty percent of orginal cost during emergencies, but the effect might be detrimental. lgl
Markets betray as well as serve, in that they are the bearer of bad tidings. One must remember that Business does scream when a warm winter reduces the sale of snow equipment, when a cool summer reduce Beach traffic, and when a new Energy bar reduces Lunch traffic. lgl

Mike Munger writes:

Have you ever actually been through a hurricane?

In Raleigh, after Hurricane Fran in 1996, power was out for nearly two weeks.

People came in trucks, trying to sell ice.

They were arrested, and their ice confiscated. What possible policy function is served by PREVEINTING people from bringing ice into the city. Of course, if they can get the same price in Goldsboro, they won't drive the trucks to Raleigh. ONLY a price differential can attract the extra resources.

Absurd to argue that the supply is inelastic; people are ingenious. If they can make money by getting the stuff to people who need, they will find a way.

Rob writes:

Don't forget that high prices also reduce demand for the resource, reducing the likely hood of it being used by those who do not need it.

Brad Hutchings writes:

A related price fixing story, score one for markets... In California, we recently saw the retail price floor for milk bring the price of a 2 gallon non-fat back to over $5.30. I remember reading a story online about it, and every time I was in the grocery store, explaining to someone in line how rich cattle farmers used this law to gouge poor working people who raise kids who like milk (and pseudo-affluent adults who still drink it by the gallon). Well guess what? That two gallon pack is back to about $3.75. Markets do learn occasionally.

Liberty Lover writes:

As David Boaz wrote recently on the Cato website, politicians believe in magic.

Michael Munger writes:

Check John Lott's article in the Investor's Business Daily, on same thread....

Tuesday, August 24, 2004
Investors Business Daily, p. A14

Let the Market Work Even During Disasters

John R. Lott, Jr.*

Distraught over the loss of their homes from Hurricane Charley, some Floridians have turned their anger on ?price gougers.? $8,000 for removing a fallen tree from a yard? $5 bags of ice? $3 for gasoline? Newspapers carry stories of an 80-year-old woman who was told when she first called a hotel that a room cost $45, but by the time she called back it was going for $61. How can anyone justify such prices?

By Wednesday, almost 1,900 price-gouging complaints had been filed with the state Attorney General?s office for everything from hotel rooms to gas to lumber to ice. Governor Jeb Bush denounces these higher prices as ?horrific.? Republican state Attorney General Charlie Crist started bringing some suits within a day of complaints.

But to the extent that government successfully suppresses prices, it is Floridians who will suffer, not just now but after future hurricanes as well.

Empty Shelves

Higher prices force people to economize, create incentives for companies to provide more and do it quickly, and make sure that people who value products the most get them. Do we really want to show up at the store and find nothing there?

-- $8,000 for a fallen tree might seem extreme, but homeowners have an alternative: wait a couple of weeks. Right now fallen trees are all over the place. There are more trees than there are people to remove them. Some fallen trees are more dangerous than others and should be removed more quickly. If prices are not allowed to rise above what they were before the hurricane, people who should wait, and save a few dollars, won?t.

-- People will be more sparing with how they use a $5 bag of ice than if they cost $1. Without air conditioning and refrigeration, everyone during August in Florida wants ice. But at a dollar a bag, stores would find themselves quickly sold out. The first people at a store will take bags even if it means just lowering their temperatures from already comfortably cool levels to cold.

-- No one wants their grandmother to pay more for a hotel, but we all also want to have our grandmothers have some place to stay. As the price of hotel room?s rise, some may decide that they will share a room with others. Instead of a family getting one room for the kids and another for the parents, some will make do with having everyone in the same room. At high enough prices, friends or neighbors who can stay with each other will do so.

You would think that people had learned their lessons about price controls during the 1970s. Price controls don?t stop the cost of goods from rising. They just change how we pay for them. Chronic shortages of gasoline had Americans waiting in lines for hours. We seemingly tried everything. California adopted a rule that limited people?s purchases to those days when the last digit of their license plate coincided with whether the calendar date was odd or even. Yet, the supposedly permanent shortages disappeared instantly as soon as Ronald Reagan removed price controls.

Greed is Good

There is another side to this problem. Companies in states all across the south, hoping to make a few dollars, loaded up their trucks with food, water, and generators. The higher the prices, the faster these ?greedy? companies and individuals got their products down to customers. But their greed meant less suffering. The more products delivered, the less prices rose.

Yet, it is not just current customers who suffer from these ?temporary? price controls. Victims of future hurricanes face a rougher time as well.

Why do grocery stores decide how much food to keep in inventory? One reason is the oft chance that some future disaster dramatically and quickly increases demand. The more a disaster might create shortages and raises prices, the more it will pay for a grocery store to add in that additional refrigerator.

The refrigerator, space, and inventories cost money. If the storm doesn?t hit, they will have extra food they won?t sell. Take away the chance to cover these costs and companies won?t make those investments.

What about the poor? Making the companies pay for others altruism not only creates the wrong incentives, it is also unfair. If we need to help out, make everyone pay. In any case, by Tuesday, the federal government was already handing out money so people could buy food and rent hotel rooms.

We'd all like lower prices, not just during disasters, but all the time. Yet, banning price increases doesn?t solve the problem, it only hides it.

Bashing companies may be profitable short-term political behavior, but, unfortunately, these same politicians probably won?t be around to accept the blame for the greater problems these regulations create down the road.

*Lott is a resident scholar at the American Enterprise Institute.

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