Monday, August 28, 2017

Anti-Price Gouging Laws: Keeping Assets in Low Valued Uses

The gulf coast of Texas needs critical supplies. It is wonderful that many are contributing out of the goodness of their hearts. But the Attorney General seems to not want to marshal the power of the profit motive.
“During declared disasters, state law prohibits businesses from charging exorbitant prices for necessities such as gas, food, drinking water, clothing and lodging,” Attorney General Paxton said. “Texans affected by Hurricane Harvey should take steps to protect themselves and report any alleged price gouging or scam contractors to the Office of the Attorney General.”

Keeping prices artificially low: 1) means critical goods flow to those who 'know a guy' rather than those who have the greatest need (as expressed by their willingness-to-pay), 2) creates an inefficient black market, and, most importantly, 3) blunts incentives for entrepreneurs to supply these goods.

5 comments:

  1. "1) means critical goods flow to those who 'know a guy' rather than those who have the greatest need (as expressed by their willingness-to-pay)"

    It does *not* mean goods flow to those with the most need. If pricing power allocates goods to those with the most need, explain why those free medical clinics in Appalachia are so popular. Hint: Need, and the ability to pay, often do not coincide.

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  2. Point well taken. I am usually the one calling for banning the word "need" from economics discussions. "Need" suggests some unstated ethical standard. Thanks for pointing out my backsliding. I will endeavor to sin no more.

    In this context, I did not see an alternative that was not clumsy. This is why I qualified it with "as expressed by their willingness-to-pay."

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  3. Having had Froeb... :-) I'm not arguing against the necessity of *some form* of price gouging. If the seller doesn't, they'll either run out, or the person who buys their supply will themselves (often but not always) engage in price gouging to subsequent buyers.

    But simple price gouging merely raises the price until supply meets demand, as you say with no thought for need, so the buyer is a convolution of Need * Rich Enough. I can't help but wonder if there isn't some form of price discrimination to deconvolve the Need from the Rich Enough, to ensure a more socially equitable distribution of goods. Theoretically at least, I'd be shocked if there was an actual practical method.

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  4. When I first read this article, I saw this as a prime example of ways the government can create unconsummated wealth-creating, or in this case, destroying, transactions. I felt so clever that I saw where I could tie this back to the text, and I figured, ah, what a great idea and feat the government is taking on - we “have to do this” so that those suffering can get the help they need. Now that I’ve read the rest of the post and the contributing comments, I’m definitely torn. I think Mathew brings up a great point that it’s a shame that we cannot find some sort of middle ground/price discrimination to prevent the movement of goods into the hands of those who are going to potentially stockpile, resell, etc. But even that seems like a slippery slope – while economically, I’m sure some sort of numeric price point could be found, I’d hate to have to be the policy makers and influencers trying to announce that we’ve determined how much or how little to value these items when there are people in a crisis.

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  5. This article made me thing about the one lesson of business. Froeb et al (2014) writes, "There are two common, but very different, reactions to this kind of inefficiency in regards to banning organ sales. Economists see it as a threat, and something to be eliminated by, for example, getting rid of the prohibition on buying and selling organs. Business people, on the other hand, see it as an opportunity, and something to be exploited. Is this the government hindering the market or a matter of ethics?

    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2014). Managerial economics: A problem solving approach (4th ed.). Boston, MA: Cengage Learning.

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