David R. Henderson  

A Poll of Economists on Price Gouging

PRINT
Report from Naples... How should we encourage export...

In May 2012, the IGM Forum, based at the University of Chicago Booth School, did a poll of economists on a proposed anti-price-gouging law in Connecticut. The economists polled were on the IGM's panel of "experts." To clarify, the vast majority of economists on the panel are experts in their own field. Their knowledge of items outside their field, as much of the polling data on many other issues show, ranges from very good down to sketchy.

Here's the exact wording of the statement with which the economists were asked to agree or disagree:

Connecticut should pass its Senate Bill 60, which states that during a "severe weather event emergency, no person within the chain of distribution of consumer goods and services shall sell or offer to sell consumer goods or services for a price that is unconscionably excessive."

Now here's the good news: Only 8% of the economists polled agreed or strongly agreed. 51% of those polled disagreed or strongly disagreed.

Moreover, when they were asked to weight their answers by their confidence in their answers, the results shifted strongly toward opposition. 7% agreed or strongly agreed. But 77% disagreed or strongly disagreed.

Some of the economists acted like lawyers. David Cutler, a health economist at Harvard, opined:

Without defining "unconscionably," I don't know what to think about this.

But no one knows what "unconscionably" means. That wouldn't stop the enforcers. Does Professor Cutler really have much doubt about how such a law would be enforced? As Richard Schmalensee of MIT pointed out, "unconscionably" is a bug, not a feature. He wrote:
Seeks to prevent prices from clearing markets; never a good thing. Standard is hopelessly vague so increases risk for affected businesses.

Richard Thaler of the University of Chicago expressed thoughts similar to ones I wrote recently in criticizing his more recent statement. I had written:
As I pointed out in my interview, by allowing price gouging, we get, to some extent, the best of both worlds. We get the traditional merchants like Wal-Mart, who worry about reputation, stocking certain supplies in advance and not raising prices. We also get the fringe, one-time suppliers, bringing in more supplies in response to the higher prices they can charge.

Thaler said it more succinctly, writing:
Not needed. Big firms hold prices firm. "Entrepreneurs" with trucks help meet supply. Are the latter covered? If so, bad.

I wish he had said that in his recent radio interview. Of course, it's possible he did but that the Marketplace producers cut that portion.


Comments and Sharing


CATEGORIES: Price Controls




COMMENTS (11 to date)
Jon Murphy writes:

Interesting poll indeed. One thing I noticed: of the people who "agreed" only Angus Deaton gave a reason:

Efficiency is less important than distribution under such transitory conditions.

It seems like he's begging the question to me. Far be it from me to question a Nobel Prize winner, but the point of prices is to distribute, to get goods where they are needed most (ie, most valued). The distinction between distribution and efficiency is non-existent; efficiency means a distribution of goods to their most valued (ie, most needed) ends. Prices, and really only prices, convey this information. To distribute, you need the information in prices, but if that information is suppressed, it makes the distribution job considerably more difficult.

For example, let's say there's some big storm. Bridgeport gets nailed and Hartford gets very little. Without prices, the tendency would be to send all supplies to Bridgeport in our example. But wait, there's more! Unbeknownst to the planners, Hartford's water system was damaged in the storm, whereas Bridgeport had no damage and has lots of potable water. If prices cannot reflect the increased demand for water in Hartford, then people (ie suppliers) will continue to send supplies to Bridgeport, where they are not needed!

Storms, especially hurricanes, cover a large area. Knowing how to distribute goods without the market signals from prices would require a level of knowledge only God Himself possesses.

James Hanley writes:

I think perhaps you mean it's a feature not a bug.

Jerry Brown writes:

I have to admit that your discussions about price gouging over the past week or so have changed the way I consider it. I still think it is a crummy, unethical response to human suffering, but see that it can have some upside to it. Maybe allowing it but still deploring it is a working solution. Thanks for making me think.

Dale Hicks writes:

I would also add that a small town grocer raised prices once during a disaster to prevent a run on staples. He then turned around and donated the excess profits to a local church that had organized relief efforts. Government imposed price ceilings always end up causing shortages.

David Seltzer writes:

Seems to me the few gougers have an incentive to offer goods and services that others in the market do not. Why don't those gouger prices draw more competition from suppliers offerings goods and services to strained consumers at lower prices? Seems to me it's a supply problem. Not a moral issue.

Jeff Hallman writes:

@Jon Murphy,

I suspect that by "distribution" Angus Deaton means distribution of income, not of goods. It is not at all uncommon for left-of-center economists to be willing to sacrifice some economic efficiency to get more equality of incomes.

Jon Murphy writes:

@Jeff Hallman:

That could be, but it wouldn't make sense in this scenario. When disaster strikes, is the first question asked: "how are we going to address income inequality?"

Trevor H writes:

What do you think about a local government imposing a 100% (or pick your number) tax on stables and gasoline in the runup and aftermath of an emergency? And of course pledge to use the windfall in disaster recovery spending.

This would have the beneficiary affect of reducing hoarding while insulating merchants from the reputation impact of price gouging.

David R Henderson writes:

@Trevor H,
What do you think about a local government imposing a 100% (or pick your number) tax on stables [sic] and gasoline in the runup and aftermath of an emergency? And of course pledge to use the windfall in disaster recovery spending.
It’s a terrible idea. It would reduce quantity supplied to zero. There would be no windfall. Revenue raised would be zero. I’m assuming your 100% number.
This would have the beneficiary affect of reducing hoarding while insulating merchants from the reputation impact of price gouging.
Actually, the opposite is the case. It would maximize hoarding. Why sell for a zero price net of tax when I can wait and make at least some money later?

AaronG writes:

@Trevor H

What do you think about a local government imposing a 100% (or pick your number) tax on stables and gasoline in the runup and aftermath of an emergency? And of course pledge to use the windfall in disaster recovery spending.

Presumably you meant 100% tax in the sense of a sales tax (so a $2 gallon of gas has a $4 cost to the person filling up). Supply does not literally fall to 0 as it would if the tax was levied against the seller for the full purchase price as envisioned by David. However, it still makes the situation worse because it shifts the supply curve to the right making it harder for the market to clear. Simply put, the end-user doesn't care who is pocketing the $4, but the suppliers certainly do.

David R Henderson writes:

@AaronG,
Oops. Thanks for catching my error.
Now that I get that he wasn’t talking total confiscation, your point is right. The amount supplied falls. The market will still clear, though, but it will clear with a lower amount. So such a tax adds injury to injury.

Comments for this entry have been closed
Return to top