The \"G\" Word

Here we go again.

After every natural disaster, the logical laws of supply and demand get removed out of the American psyche. Instead, just like clockwork, typing in "gouging" and "Hurricane Charley" into Google will net more than enough results to keep one occupied all morning.

From this Washington Times article:

Some greedy merchants started ahead of the storm. He cited one complaint about a man in the Orlando area who normally leases generators for $250 a day with no requirements. He boosted the price to about $400 a day just before the storm hit, and implemented a seven-day minimum policy.

As it should be. With everyone and their brother interested in leasing a generator (a.k.a. sky-high demand), the merchants keep their supply in check by offering a higher-than-normal price. This price weeds out those who are only mildly interested in a generator, and instead supplies the market that really needs it. Instead, the merchants are simply called "greedy" for using common sense.

In the aftermath of Hurricane Andrew in 1992, Florida passed a law banning needlessly inflated prices after a declared "state of emergency." (bold added)

"Needlessly"? Says who?
It gets worse...

Consumers were warned to not pay extremely high prices for commodities like water, gasoline, batteries, food, hotel rooms, ice, lumber and generators.

:wall:

On the saner side of things, Neal Boortz says:

First we have the guarantee in the United States Constitution that the government will not interfere with the operation of valid contracts between individuals. An agreement by one to sell and another to purchase a chain saw for three times its common retail price is a contract between two individuals. As long as that contract is voluntarily entered into, and there is no fraud involved, and the parties are of the legal engage to execute a contract ... the government has no legitimate cause to intervene.
I'm told that yesterday some reporter from the Fox News Channel said that chain saws were being sold in the path of Hurricane Charley for "more than they're worth." Think about this for a moment. If you needed a chainsaw to clear some trees around your home, would you willingly go out and pay more for that chainsaw than it is worth to you? The value of that chainsaw increases with your need for it. If the cost exceeds that value you will walk away. The actions of free people operating in a free market set prices. The only time you will see a product costing more than it is worth is when the government steps in and interferes with basic economic liberties by setting the cost of a product or service.

Couldn't have said it better myself.

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Patri - that outrage seems

Patri - that outrage seems to be a public good, and thus not obviously likely as an evolutionary adaptation.

Anton - avoid extended characters in future!

"David Friedman has

"David Friedman has suggested that it may be an evolutionary adaptation."

I don't see why this needs explaining; I don't find it odd that people get agitated when they can't get what they want, especially in a pinch.

Natural Disasters and price

Natural Disasters and price gouging
Those who denounce "price-gouging" do not explain how supply of essential goods will increase if price is kept artificially low.

They don't explain it

They don't explain it because they can't. its a knee jerk 'age of envy' reaction to any kind of outcome where someone gets 'more' than someone else, and like petulant children, they want 'mom' to do something about it. typical reaction to decades of idiotic socialist/religious brainwashing and certainly not surprising.

J.T.K., I would like to

J.T.K., I would like to apologize for threatening to knock a snot bubble out of your head the other day. I won't try to excuse it, let's just say I was annoyed and that is my attempt at combining humour with annoyance. If I post in the future, I will at least attempt to do so with more maturity.

Jonathan, again thank-you for stopping in at my blog in attempts to continue the conversation. I've restricted the comments again in effort to calm the storm there.

Let me start all over again re:price 'gouging', please. My original comment really had nothing whatsoever,actually, to do with legitimate shop keepers or business owners. Whilst my fingers were just flying away on the keyboard, I was really thinking back to the blackout of last year, and the people who raced off to the stores that were open as long as they had generator support and cleaned the shelves to set up 'shop' on a street corner gallon jugs of water for 6 bucks, 50-cent candlesticks for $3.50. These people infuriate me. Can these people be seperated, for legal purposes, from legitimate shop owners? Does anyone else see a difference between these?

I've gotten into the habit on my blog of just letting my thoughts flow as I read the morning news after work[I'm a night shifter]and perhaps my thoughts at that time of day are just too unorganized. Pardons. My socialist tendancies still lean towards feeling sorry for people having to pay more for necessities during a crisis, but you all bring up excellent reminders from the store has to remain open, possibly repair, order extra goods, etc. all the way down to it's his/her store and they should be able to do what they want with their stuff.

Thanks again to those here who are so patient, and to any I've offended my apologies.

~Michi

I'll check back to see if my

I'll check back to see if my post is just in moderation. [I hope.]

Don Boudreaux has an

Don Boudreaux has an excellent entry on the G word over at Cafe Hayek. I thought this explanation was very clear:

The higher prices charged by merchants are best thought of as a series of communications â?? clear messages to consumers that existing supplies must now be economized on more rigorously than before, and clear messages to suppliers that extra profits are available to anyone who can speed to the scene of the disaster goods and services that people desperately want.

Criticizing merchants who charge these higher prices is much like criticizing messengers who bring unwelcome news. The news aint the fault of the messengers. And if messengers who deliver unwelcome news are silenced â?? if they are prevented from delivering it, or punished for doing so â?? then those who should know the reality of the situation remain in the dark, unable to respond in ways that minimize long-term harm.

Why is this important?

Why is this important? Because the presence of arbitrage opportunities indicates that the market price is not at equilibrium. There is too much demand and not enough supply. By participating in arbitrage, the â??scalperâ?? sends a signal to other suppliers that there is a profit opportunity, thereby giving them an incentive to produce more. This is the allocation function of prices.

Isn't a hurricane a big enough signal that demand will be bigger than supply? We are not talking about a normal circumstance. This is an emergency where everyone knows demand will be at an extreme high

There is also the rationing function of prices.

Wouldnâ??t it make more sense for an ethical store owner to just directly ration out the goods, and forgo the possible large profits. Thereby allowing people who can't easily afford it to get the essential supplies too? Do you think this kind of scalping in an emergency situation is ethical? What would you do?

I'm not saying the government should ban this practice. I'm just curious about the ethical status of it. Can some thing be unethical and at the same time have a useful purpose? I find that hard to accept.

Michi, Your post is indeed

Michi,

Your post is indeed stuck in moderation. Unfortunately, I don't have authority to authorize it. One of my co-bloggers will eventually get to it.

I don't think you have any reason to apologize. Your initial outrage at price gouging is a concern shared by the majority of the public. It is the job of the economist to explain why that outrage is misguided. It is not the job of the economist to insult the layman for not knowing the economics behind price increases during times of emergency.

I'll respond to your comment before it becomes visible to everyone else. The "scalper" -- an unauthorized middle man who purchases products like bottled water, chainsaws, or portable generators during times of emergency and resells them at a much higher price to the end consumer - serves a legitimate and necessary function in the market. This is the same function served by day traders who do nothing but buy stocks low and sell them high. This function is called arbitrage: the purchase of a security, commodity, or foreign currency in one market for the purpose of immediately selling it at a higher price in another market.

Why is this important? Because the presence of arbitrage opportunities indicates that the market price is not at equilibrium. There is too much demand and not enough supply. By participating in arbitrage, the "scalper" sends a signal to other suppliers that there is a profit opportunity, thereby giving them an incentive to produce more. This is the allocation function of prices.

There is also the rationing function of prices. By purchasing a product from the supplier, increasing the price significantly, and then offering the same product for resale, the scalper insures that the end consumer will be the one who values the product the most. If this did not happen, there would be a significant risk that other consumers who do not value the product as much would purchase the product first. A number of posters in this thread already gave real-world examples of this phenomenon.

I wrote an article about the purpose of prices, which you may or may not have read (The Purpose of Pain). In the article, I compare prices to pain: nobody likes pain, and nobody likes high prices. But the alternative of no prices (or distorted prices) and no pain is even worse. Negative signals are unfortunate, but very necessary.

Thanks, Micha. I believe I

Thanks, Micha. I believe I did read that article when it first came out -- but it didn't make any sense to me at the time.

Now I 'get' it, but there's still a little voice inside saying 'but. . . but. . . but. . .!'

~Michi

Price Gouging is

Price Gouging is Good
Nothing beats laying it all out in the title.
Hurricane Charley finished devastating Florida last week and needless to say, things are messed up there. Specifically, it's very difficult to find things most of us take for granted such as food, shelter...

" It is the job of the

" It is the job of the economist to explain why that outrage is misguided."

Whether or not it is misguided would depend entirely on one's arbitrary values, would it not?

Economics can't tell you what your values ought to be, can it?

I think it's from Rand's

I think it's from Rand's "Capitalism: The Unknown Ideal" and pretty early on, since I only read about the first 20 or 30 pages. But I'm definitely not 100% sure.

Micha wrote:

"Someone, either Thomas Dilorenzo or Walter Block mentioned this at Mises U. Itâ??s a great quote. Anyone know the original source?"

No more or less pointless

No more or less pointless than when the opposing sides each dust off the particular variables or statistics or anecdotes that bolster their cases.

Micha wrote:

"This thread is also a great demonstration of why JTKâ??s method of argument (and by extension, Billy Beckâ??s) is pointless."

Why not force businesses to

Why not force businesses to sell everything free in a disaster zone? If these socialist idiots have their way there won't be anybody left to receive anything.

Michi (WWB) is not the most

Michi (WWB) is not the most incompetent debater youâ??ve ever seen. JTK made precisely the same argument in this thread: both are claiming that â??X is wrong, period.â?? You just happen to agree with JTK, so you probably donâ??t notice that when he writes, â??[I]tâ??s not your property, itâ??s theirs. And that means theyâ??re entitled to dispose of it as they see fit,â?? itâ??s just as convincingâ??and by that I mean just as unconvincingâ??as Michiâ??s argument that â??Itâ??s just so wrong to profit excessively from such, that I donâ??t care whose principles it offends to punish someone willing to do so.â??
-Micha

No, Michi asserts that X is a moral wrong with no further explanation, assuming most will agree with him. JTK, however, invokes the idea of property rights as a justification of his argument. He doesn't have to explain property rights every time he mentions the concept, even if no one agrees with him. The term is shorthand for a complex series of philosophical and moral arguments made over centuries, and you (Micha) are as aware of them as anyone.
Michi doesn't cite any philosophical or moral principle in asserting that X is wrong, so Michi's argument is weaker.

About that "price gouging"

About that "price gouging" thing in Florida
I often keep the Fox News Channel playing in the background while I work, and the last couple of days...

Moral outrage against

Moral outrage against "gouging" seems to be fairly widespread. David Friedman has suggested that it may be an evolutionary adaptation. The idea is that if its widely known that people get very angry if you raise prices in an emergency, a merchant may decide not to, so he doesn't lose too much future business (or get his shop burned down).

In general, committment strategies are big advantages in games, especially bargaining ones. (The classic example is that if you are playing chicken, and you throw your steering wheel out the window, and the other guy sees you do it, you win). However, I'm a little skeptical of whether that applies here - for one thing, you lose out on the potential gains described in this thread.

WWW, "No, J.T. -- because

WWW,

"No, J.T. -- because it's wrong "

When you assert authority to say how they may dispose of the property in a market you are effectively asserting that it's your property.

That's what's wrong - it's not your property, it's theirs. And that means they're entitled to dispose of it as they see fit.

I wonder...when was the last

I wonder...when was the last time you heard anyone criticizing Blockbuster for giving price discounts on older movie rentals and restricting new releases to a two-day minimum?

But about that Boorz quote: Since when did the Constitution say anything about the government not interfering with contracts? Sure, you could interpret the 9th and 10th Amendments and the implicit enumerated powers doctrine to make this argument, but unless I'm missing something blindingly obvious, the Constitution does not explicitly guarantee freedom of contract.

And as much as I like the :wall: smiley, it seems like it could be applied to almost every single post at Catallarchy. :???:

Our heads will break long before the wall. :cry2:

In the comments section to

In the comments section to Roderick Long's blogpost on Liberty & Power (mentioned above by Gil), Mark Fulwiler writes:

If you charge less than the competition, you are guilty of "unfair competition." If you charge the same as the competition, that's "collusion." If you charge more than the competition, or more than the government thinks is "fair," that's "price gouging"!

Someone, either Thomas Dilorenzo or Walter Block mentioned this at Mises U. It's a great quote. Anyone know the original source?

Andy, It also has to do with

Andy, It also has to do with public relations. People don't like to be charged high prices especially in times of emergency. It may be in the store owners best interest to charge less than market value in order to show good faith with the community. Scalpers don't have to worry about that

Response to Micha, Isn't a

Response to Micha,

Isn't a store owner, by maintaining prices at a level in which everyone is able to pay, attempting to reduce the negative effects of income inequality by giving charity in-kind? The result is the substitution of willingness to arrive on line early for willingness to pay, a sorting mechanism which may be less affected by pre-existing income inequalities. Of course, this kind of indiscriminate time-based charity may not be as ethically effective as a decision that takes into account the history of potential customers, suffering, etc., but in the absence of effective in-cash charity, replacement of monetary costs with time costs may produce a better alignment between desert and ability to pay.

But, this does ignore the point that these anti-gouging laws are mandatory, and so the store owner is not voluntarily performing this private charitable activity. Could it be viewed, then, as a form of public charity, paid for by the loss of a potentially greater income for the store owner?

Mongoose, Such a law would

Mongoose,

Such a law would be either unnecessary or harmful. Unnecessary because the structural incentives of a free market already lead to that outcome. Harmful because no law can take into account all of the specific circumstances of the situation; the law cannot distinguish between the correct and incorrect circumstances for when prices should rise. Hence, the law may mandate a price increase when none is warranted. Which is what happens in most cases of "dumping".

JustAVistor,

It is true that a store owner is effectively giving charity by maintaining stable prices during times of emergency. And that may be okay. However, I see a number of problems. First, he is giving to charity to all of his customers, not just the poor, but also the rich. If he truly wants to help the poor, he should raise prices, and donate any additional profits to poor people in the disaster zone. Second, assuming this is not a monopolistic or duopolistic market (i.e., assuming there are more than 1 or 2 retailers in the market), one individual retailer's decision to keep prices stable as a form of charity might not distort price signals, but a market-wide poliicy imposed by government (or a widely adopted social norm) to keep prices stable would result in distortion, and thus lengthen the shortage.

It is also not clear that substituting waiting in line for paying higher prices truly helps the poor. Rich people can also afford more leisure time than poor people. A poor person who works multiple shifts to support his family may not have the free time to wait in excessively long gasoline lines, for example.

Micha, I was joking about

Micha, I was joking about the "we should make a law". Notice the big smiley face :grin:

Unfortunately, what may

Unfortunately, what may obviously be a joke to some appears as wise public policy to others. Case in point: fast food lawsuits.

Micha, "Nobody likes

Micha,

"Nobody likes shortages and nobody likes allocating resources to those who donâ??t value them as much as other people."

Obviously may do do prefer such allocation when they benefit from it.

And why shouldn't they?

Who benefits from shortages?

Who benefits from shortages? Who benefits from misallocation of resources during times of emergency?

Obviously, a number of people do benefit from these misallocations relative to what would be under a regime of no anti-gouging laws. But these people are a dispersed, unorganized group. More importantly, they are grouped by luck, meaning, ex ante, people do not know whether they will be first or last in line. This is not the kind of group that would give political support to anti-gouging laws. Ex ante, it is in everyone's interest to oppose them. (Except for politicians who use anti-gouging laws to demonstrate that they have "done something" to address the emergency.)

Price Gouging: Touch the

Price Gouging: Touch the Toaster
A bunch of blogs had some very good price gouging threads after Hurricane Charley... There was one small omission, however, upon which I commented in the H&R thread. Here it is...