David R. Henderson  

Price Gouging is Fine but Humans are Better

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Reminiscences of Rand and Buck... Henderson at Adrian College in...

When we economists argue against laws that prohibit price gouging during emergencies, we point out, correctly, that such laws create shortages, reduce the incentive to conserve, and discourage suppliers from supplying more. This month's Econlib Feature Article author, economist Michael L. Davis, agrees with that. But, he points out, we should be more restrained in our celebration of price gougers. The case against laws restricting price gouging, he writes, shouldn't rest on the assumption that people are greedy. They are often not greedy and, in fact, are often generous. Davis's case against price-gouging laws is that such laws limit the ability of good people to do useful things. He concludes, "Economics doesn't teach us that markets are always good; it teaches us that people are really good at figuring out when to rely on markets."

The above is my blurb about an exciting new article on Econlib by Michael L. Davis. Here's the link.

Here are two of my favorite paragraphs:

If you're a really thoughtful innkeeper, though, you might end up behaving just like your greedy, selfish caricature. You might, for the noblest and most enlightened reasons, sell only to the highest bidders.

To see why, assume that you're not only good, but also smart. You know that good intentions aren't enough. You know that assigning a room to one family means turning another family away. And when every family is desperate, who is most desperate? Econ 101 doesn't claim to show that willingness to pay captures some deeper values--Mary and Joseph were, after all, unwilling to pay for a room at the inn--but maybe it's the closest thing you've got.


And here are two more:
This is not an original idea. Those who favor prosecuting price gouging are eager to point out that in extraordinary circumstances, markets sometimes break down. But so what? The question is not whether markets always work or whether willingness to pay is always the best measure of value. The question is: who should decide? Should we trust the innkeeper standing in the rain listening to the crowd clamoring for the room, or should we trust the politicians in the state capital listening to the crowd of reporters clamoring for a sound bite?

If you have any doubt as to the correct answer to that question, think about what actually happened in Texas and Florida. In the immediate aftermath of the destruction, people needed each other far more than in ordinary times. Cooperation with others wasn't just a good way of securing material comfort; it was necessary for survival. But it appears as if people mostly chose not to use prices and markets to coordinate their activities. When the waters rose, neighbors helped neighbors without any expectation of reciprocity, let alone an employment relationship. In fact, strangers came from all over the South to help. Business owners didn't generally radically raise prices: for every story about "price gouging," there were multiple reports of merchants who just opened their doors to let people take what they needed and pay what they could.


And finally Michael's conclusion:
Since at least the Scottish Enlightenment, classical liberals have understood that "spontaneous order"--order that develops from human action but not from human design--is critical to understanding how societies work. Markets and prices are one example of spontaneous order, but they're only one example. Economics doesn't teach us that markets are always good; it teaches us that people are really good at figuring out when to rely on markets. And that's what we should be teaching our students and our politicians.


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COMMENTS (1 to date)
Isaac Kogure writes:

From the eyes of a business man price gouging is smart. Major profits can be made because people need the goods that are being charged more for. In economics this means that the good is becoming more elastic. People are willing to pay more because they need the good. During a hurricane or tornado electricity may be lost so people must rely on generators. If they have no gas for the generators or they run out of gas for the generators, they must buy more. They would be willing to pay any amount of money to get that gas which skyrockets profits for the suppliers.
In the perspective of being human, price gouging during emergencies is wrong. People going through these emergencies are already losing a lot and facing major financial losses. This may come from the loss of damage of their property. Basically, suppliers are taking advantage of the weak. I am not saying that suppliers should not raise prices in emergencies. I get it, if demand is high you are going to raise prices, but gouging is kind of excessive.
Supplies may be impacted by an emergency. I get prices going up in that situation as well. If a major road is closed by flooding or by some natural disaster, supplies must be rerouted. This costs more to transport these goods to their destination. In this case suppliers must raise prices to make a profit. If they do not their business may not be able to survive. It all depends on the emergency.

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