[REPOST from 2020] Dying from Protection from Gouging

David DiSalvo has a write up at Forbes on his experience trying to obtain N95 masks during this pandemic. Federal and state officials say they are "scouring the globe" for PPE while some medical professionals are going without. Here is his summary.

• Millions of N95 masks have been available throughout the U.S., Canada and the UK during the pandemic, according to brokers trying to sell them.
• The high price point per mask, driven by extreme demand, has contributed to an overwhelmed reaction among potential buyers, especially in the U.S.
• Scrutiny surrounding these deals is high because of ongoing scams and claims of price-gouging, both of which are triggering emotionally charged reactions and fear of making deals.
• Millions of masks are being purchased by foreign buyers and are leaving the country, according to the brokers, while the domestic need remains alarmingly high.

The entire article is fascinating. Buyers have to be on their guard against scams as there are ample opportunities for fraudsters. Prices for masks, which had been close to $4 a week before, ranged from anywhere between $6 - $7 per mask (at the time of his writing) which has raised concerns about price gouging. Sales to foreigners do not face such scrutiny.

By the end of the day, roughly 280 million masks from warehouses around the U.S. had been purchased by foreign buyers and were earmarked to leave the country, according to the broker — and that was in one day.
(emphasis in the original)

BOTTOM LINE:  Fear of price gouging laws is causing US suppliers to sell overseas.  Price gouging laws are keeping medical professionals from protection against COVID-19, and presumably killing the very people who are trying to help.  

Hat tip: Marginal Revolution

Trying to do Good does not turn out Well

At the beginning of the pandemic, the demand for N95 masks outstripped the available supply. Prices doubled overnight to near $7 per mask (and availability was exasperated by price-gouging concerns, see Dying from Protection from Gouging). Two guys from Fort Worth, Texas wanted to save lives. They understood that the solution would require an increase in supply, so they started United States Mask to fill the gap. However, as the Dallas Morning News reported, they may not have appreciated the obstacles they were up against.

First, the had to obtain certification. “There’s no guidebook, and it’s not easy. The application process alone is 100 pages long.” But that accomplished, they produced their first mask last October. But that was for federal certification. Even so, there was reluctance to purchase from the home team by the county because it had not tested the masks themselves.

Second, how to advertise?  "The two guys say they are having difficulties placing online ads because hosts don’t want to be associated with fraud that runs wild in the mask industry."

Finally, between March and October, many existing competitors could ramp up their production. Either input costs are lower in China or their are substantial scale economies. A quick search on Amazon reveals current prices of popular Chinese imported masks run from $1.50 to $2.00. United States Masks come in at $2.25.

The last refuge of a vacant liberal mind: blaming inflation on anti-competitive behavior

In the late 1970's at Stanford, I heard John Kenneth Galbraith, the economist in charge of price controls during WWII, call the idea "the last refuge of a vacant liberal mind."  The turn of phrase was so elegant and shocking--at the time, I was a liberal--that it has stayed with me.  

Here are some modern takes on this old canard.

NYT (8/16/24) "Price Gouging"

In detailing her presidential campaign’s economic agenda, Vice President Kamala Harris will highlight an argument that blames corporate price gouging for high grocery prices.

...

The Harris campaign announcement cited meat industry consolidation as a driver of excessive grocery prices, but officials did not immediately respond on Thursday to questions about the evidence Ms. Harris would cite or how her proposal would work.

 NYT (12/23):  "Greedflation"

During the debate, President Biden once again blames inflation on corporate greed. This follows an old, albeit-debunked, strategy that I first heard about as undergrad in the 1970's. Here are some modern takes on it

As rising inflation threatens his presidency, President Biden is turning to the federal government’s antitrust authorities to try to tame red-hot price increases that his administration believes are partly driven by a lack of corporate competition.

On Christmas 2021, the headline in the NY Times business section was "As Prices Rise, Biden Turns to Antitrust Enforcers."  Larry Summers immediately bashed the idea:

“The emerging claim that antitrust can combat inflation reflects ‘science denial,’ ” tweeted Harvard economist Lawrence Summers, a senior official in the Obama and Clinton administrations. “There are many areas like transitory inflation where serious economists differ. Antitrust as an anti-inflation strategy is not one of them.”

[Repost from 2009?] Stossel on price-gouging

Another video story as only Stossel can tell it, from his time at ABC's 20/20. 

See previous, and funny and tragic posts on price gouging laws that 

1. make it easy for low value buyers to outbid higher value buyers for the scarce goods; and
2. eliminate the incentive for suppliers to: (i) prepare for the next emergency; or (ii) enter the market in this one.

NOTE: Stossel left ABC for Fox in 2009, and this original story ran on ABC.

Why shortages appear

Blame prices that are not allowed to adjust:

Hit by a cascade of complaints from consumers, the New York Attorney General’s Office launched a probe on Monday into price gouging in the state in the wake of Hurricane Sandy.

The complaints centered on gas-price hikes but also include reports of jacked-up prices on everything from emergency supplies like generators to higher hotel rates and loftier prices for food and water.

 “Our office has zero tolerance for price gouging," NY Attorney General Eric Schneiderman said in a statement. "We are actively investigating hundreds of complaints we've received from consumers of businesses preying on victims of Hurricane Sandy, and will do everything we can to stop unscrupulous individuals from taking advantage of New Yorkers trying to rebuild their lives."

Not only do higher prices cause shortages to disappear (by encouraging conservation on the demand side, and increases in supply), but they also give consumers and firms an profit motive to find ways to alleviate shortages in the future. 

[REPOST from 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.

[REPOST from 2011]: Economics ignorance in Tennessee

in 2008, Hurricanes Gustav and Ike reduced gasoline production in the Gulf of Mexico which reduced gasoline supply to the state of Tennessee. As would occur in any well functioning market, price went up (by about $0.85/gallon). These higher prices encouraged conservation, and ensured the availability of gasoline to those who really needed it (like someone who has to get to a hospital). In the long run, higher prices during emergencies give incentives to suppliers to alleviate future shortages.

Unfortunately, in Tennessee and 30 other states, such higher prices are also illegal: the state prosecuted 17 firms for raising price.

 It is not clear whether the suits were caused by overzealous enforcement or by the vague statute which prohibits increases “grossly in excess of a price generally charged." Any economist could build an argument that such enforcement is immoral using a consequentialist ethic, but it also seems to fail on simple deontological grounds:

It is the special claim of the virtue argument that it intends to promote a civic virtue of shared sacrifice for the common good, yet price gouging laws are destructive on both points. Because price gouging laws interfere with price signals, resources from outside of the disaster-affected area are not so readily mobilized. Rather than promoting a shared sacrifice in response to a disaster, economic damage tends to be more localized. A further result of interfering with price signals is that fewer resources get to where they are most needed, and therefore the common good is harmed rather than promoted.

The naive reaction to higher prices following an obvious supply decrease seems to represent an embarrassing failure of economics education in the state of Tennessee. Perhaps we need a "competition" day, as they have in Europe, so that we can spread the good news of markets to state legislators and those who enforce the law.

What Nashville can Learn from NYC: Affordable Housing mandates reduce the supply of affordable housing

The Nashville City Council is considering requiring that a certain percentage of units in new residential developments be priced as affordable. The mandates would apply to multi-unit developments bigger than five units.

While this may sound good, lets think clearly about its effects: mandates reduce the profitability of new development.  This will lead to less new development, or developers will substitute towards smaller developments, not subject to the mandate.  In the former case, fewer new developments would be built; in the latter, lower-density development would take place.  Either way, this represents a decrease in supply.  A decrease in supply would increase price, exacerbating the very problem--expensive housing--that it was designed to ameliorate.   (And don't forget that density is green.)

Housing markets are also subject to what is known as "filtering," apartment rents tend to go down as the apartment building ages.  So today's expensive housing is tomorrow's affordable housing.  This implies that a reduction in the supply of expensive housing today, will reduce the supply of affordable housing tomorrow.

These kinds of zoning restrictions are popular because they drive the price of existing housing above replacement cost, benefiting Nashville's homeowners. But they come at the expense of renters and new residents. As the Financial Times put it:

They are the ransom that renters and recent buyers must pay to existing homeowners – whose homes the rules protect – for use of an artificially limited stock of housing. So severe have those restrictions become that the value of the ransom runs into the trillions. 

Wealth of this kind is far more destructive than the alleged sins of the top 1 per cent. It is wealth created not by improving our living standards but by making them worse; by building too few houses in London and San Francisco, not too many. It is not earned by skill or effort. It is taken directly from the pockets of some – the young, especially those who were born poor – and transferred to others via political regulations on building. This is not wealth, this is plunder. 

The effects of affordable housing are similar to price gouging laws that in Mississippi prevented generators from reaching the Gulf Coast after Katrina. Similarly, affordable housing mandates will prevent new housing from reaching Nashville.  The market wants to help, so let it.

OK, if mandates won't do it, how do we increase the supply of affordable housing in Nashville?  Here I think Nashville could learn something from New York.  In New York, the affordable mandates are triggered only by a relaxation of zoning.  For example, a developer buys up a block of houses and asks the planning commission to re-zone it for a multi-unit apartment complex.  In exchange for the zoning change, the developer agrees to set aside some of the units for lower income tenants.

The crucial difference is that in NY, affordable mandates are triggered only by development that increases supply.  In contrast, the proposed change in Nashville would reduce supply.

[REPOST from 2015] 

The Egg Market Rebounds

To prevent the spread of bird flu, 166 million birds were culled, most toward the end of 2024. Since the US typically has about 400 million egg-laying hens at any time, this was significant. With fewer hens, the supply of eggs also fell causing egg prices to more than double. Thankfully, this market disruption already appears to be behind us. A recent USDA report shows that production and egg prices have mostly recovered to where they were a year ago. 

 

Damn that's fast. And just in time for Easter egg hunts. Not even the Ag sector expected the recovery of the egg industry so quickly. Just last month, Farm Progress forecasted, "The U.S. poultry industry could take a year or so to recover from the recent HPAI outbreak." They were only off by 11 months.

The speed of this adjustment is a testament to market forces. With prices doubled, egg producers saw a huge opportunity for short-run profits. Hens that might have been "retired" a year ago would be kept in service a bit longer. Chicks that might otherwise have been deemed unacceptable would be allowed to mature. Had the policy response instead been to impose egg price ceilings to prevent price gouging, the blunted profit motive would have weakened the supply response. Allowing the market to operate alleviated the shortage in short order. 

Egg Market Makers

The WSJ reports on the Egg Clearinghouse, or ECI while we are in the midst of the recent dramatic egg shortage and increase in egg prices.

While the article mentions that some have suggested price gouging, it seem more likely that supply has shifted in because temporarily, there just are not enough egg laying hens to supply the market.

The deadliest outbreak of avian flu in history has resulted in the death of more than 100 million U.S. chickens, turkeys and egg-laying hens since 2022, according to the Agriculture Department. Once infections are identified in a single bird on a farm, whole flocks are often eliminated to prevent further spread, creating supply shortages in some regions and grocery stores.

As a consequence, the number bids to buy eggs is now more than double the offers to sell. 

 

 

 

Uber and Economics versus Business

In another insightful piece, Megan McArdle describes one way that business pricing models differ from pricing from naive economic models. Uber's pricing mechanism matches supply and demand at a time and place in real-time. So, when supply is limited, e.g., a cold New Year's eve, the suppliers are accused of "gouging." Echoing long understood economic principles, she writes:

When demand is very high, and supply is very limited, the right thing to do is let prices rise. This performs two functions: It ensures that available supply is distributed to people who want it pretty badly, and it can attract more supply into the market.

But the she adds the insight:

We do not like market transactions made under duress, even if the seller is not responsible for the duress. Merchants in disaster areas often charge less than they could because they know that the goodwill costs will exceed the profits from maximizing their markup.

Sometimes the actors in real life stubbornly refuse to behave the way our models assume.