Category Archives: Law

America’s surveillance state: Can you hear me now?

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Lynne Kiesling

Today has seen a flurry of information in the wake of Glenn Greenwald’s breaking the news in the Guardian last night about the National Security Agency’s (dubbed in the Washington Post the “eavesdropper in chief“) collection of Verizon phone customer metadata on a daily basis. Here’s a roundup of the resources I have found most useful and informative:

Shane Harris in the Washingtonian provides an overview of the NSA metadata surveillance program. If you are not familiar with metadata, this is a good place to start:

In fact, telephone metadata can be more useful than the words spoken on the phone call. Starting with just one target’s phone number, analysts construct a social network. They can see who the target talks to most often. They can discern if he’s trying to obscure who he knows in the way he makes a call; the target calls one number, say, hangs up, and then within second someone calls the target from a different number. With metadata, you can also determine someone’s location, both through physical landlines or, more often, by collecting cell phone tower data to locate and track him.

The NSA is data mining to look for patterns, ostensibly with a national security/terrorism reduction objective. They store, analyze, manipulate the data on our communications. These surveillance activities are supposed to be applied only to foreign communications may be associated with terrorist threats, not to the widespread collection and storing of the communications metadata of U.S. citizens.

And they have done so under legal authority granted in the late 1970s to FISA courts. Timothy Lee in the Washington Post provides background on the use of FISA courts. The FISA courts were fairly moribund until the Patriot Act created Congressional authority for the NSA to use FISA courts to process secret authorizations of widespread surveillance of our communications. The authorizations processed in FISA courts are rolling three-month authorizations, and according to a USDOJ Office of Legislative Affairs report in April 2013 to the Senate, of the 1,976 surveillance requests the NSA made, the FISA court did not reject one. Seems suspiciously like a legal rubber stamp …

Julian Sanchez does an excellent job of explaining why the NSA’s collection of our communication records is a problem:

We are, predictably, being told that this program is essential to protecting us from terrorist attacks. But the track record of such claims is unimpressive: They were made about fusion centers, and the original NSA warrantless wiretap program, and in each case collapsed under scrutiny. No doubt some of these phone records have proven useful in some investigation, but it doesn’t follow that the indiscriminate collection of such records is necessary for investigations, any more than general warrants to search homes are necessary just because sometimes searches of homes are useful to police.

And Arik Hessedahl at All Things D reminds us that we, the citizen-voters, are the boss:

Now that we live in an age where data storage is inexpensive and computing power all but limitless, finding that meaning and achieving that understanding is simply a matter of will.

Clearly, the will exists, or the court order would not have been sought or granted. But will implies intent, and we can only guess at that intent. Officials in all branches of federal government have a long history of overstepping their legal authority and of abusing outright the powers granted them by their boss.

That boss, by the way, is us.

At this, it’s worth reminding ourselves what the boss’s policy is. It’s contained within the Fourth Amendment to the Constitution:

Which, by the way, has been in precipitous decline over the past 13 years, as the surveillance state has evolved in the face of either fear or indifference, or both.

Other useful commentary today is from Jim Harper of Cato in the Daily Caller, Kashmir Hill in Forbes, and the editors of Bloomberg News.

But the most striking commentary is from the editors of the New York Times, who state that “the administration has now lost all credibility”.

You are not entitled to a profitable business model

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Lynne Kiesling

Cory Doctorow at Boing Boing highlights the Supreme Court’s copyright decision in Kirtsaeng v. John Wiley & Sons. Briefly, Wiley wanted the court to enforce copyright in a way that restricts the flow of book purchases across geographic regions (i.e., limiting the ability to buy cheaper versions elsewhere online).

Clearly Wiley was attempting second-degree price discrimination, and the Internet makes arbitrage prevention nearly impossible, so this case is a good illustration of how price discrimination can fall apart.

But I’m more interested in the fact that the defense was attempting to use a “but … but we can’t make money if they can buy cheaper versions from other regions!” argument to get the court to expand the copyright breadth. The ruling’s smack-down of that line of argument is beautiful:

Third, Wiley and the dissent claim that a nongeographical interpretation will make it difficult, perhaps impossible, for publishers (and other copyright holders) to divide foreign and domestic markets. We concede that is so. A publisher may find it more difficult to charge different prices for the same book in different geographic markets. But we do not see how these facts help Wiley, for we can find no basic principle of copyright law that suggests that publishers are especially entitled to such rights.

You may enter an industry and build up your business, but you are not entitled to having that business remain profitable ad infinitum. You have to work harder to avoid becoming the destruction in creative destruction. And if you do that, and consumers benefit from it, you’ll profit too. Funny how that works.

Are property rights now more clearly defined for organic farmers in Minnesota?

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Michael Giberson

The United States Supreme Court chose to let stand a Minnesota Supreme Court decision concerning the rights of organic farmers exposed to pesticide drift from neighboring conventional farms. In the case Johnson v. Paynesville Farmers Union Cooperative Oil Co., the organic-farming Johnsons had sued conventional-farming Paynesville for damages after pesticide drift from Paynesville’s farm damaged the Johnson’s organic crops and required some of Johnson’s fields to be held out from organic production for up to three years. The U.S. Supreme Court action left in place Minnesota’s decision which held Paynesville was not responsible for harm to the Johnsons’ organic crops.

The case provides a good background for exploring questions of externality and property rights (i.e., a real live case for contemplating Coasian reasoning):

  • At one time both the Johnsons and Paynesville engaged in conventional farming, including the application of pesticides. Pesticide drift was a non-issue.
  • In the 1990s Johnsons decided to switch to organic farming. They posted signs declaring the property was to be used for organic farms, established a buffer zone between their organic fields and adjacent properties, and asked Paynesville to take actions to avoid overspraying Johnsons’ fields. Then they operated without pesticides for three years in order to qualify to market their product as organic.
  • Subsequently, pesticide drift from the Paynesville farm has resulted in damages to the Johnsons on at least five occasions: crops have had to be sold at lower non-organic prices, crops had to be destroyed, and fields had to be held out of organic production for three years after the pesticide overspray.

The story may be framed as a simple case of negative externality: Paynesville’s operation are imposing an external cost (i.e. “polluting”) the Johnsons’ operations. The beginning economist will jump to the conclusion that efficiency requires a tax on Paynesville, or, in the case of a more thoughtful student, liability for damages.

But the question of who is creating the externality is a bit more complicated, observes the more advanced economics student. After all, pesticide drift is only a problem because of the Johnsons’ choice to go organic. You might say that the Johnsons caused the problem by starting up an organic farm in an area they knew was subject to occasional pesticide drift. If you build your house adjacent to an airport, you don’t really have much ground to subsequently complain about the related noise and traffic.

In class discussions when I’ve talked about this case, most students will side with the Johnsons at first. The question that moves many of them back to Paynesville’s side is this: “If Paynesville had the right to its manner of operations before the Johnsons switched, how did the Johnsons acquire the right to force Paynesville to change its operations?” Or sometimes, this question: “No one is too worried if Johnsons’ choice results in a higher cost of operation for the Johnsons, but on what grounds do the Johnsons get to impose a higher cost of operation on Paynesville?”

(Note that you can move students to the Paynesville side by asking, “What right does Paynesville have to limit the Johnsons ability to farm the way they please on their own farm?” Also relevant, Minnesota farming regulations prohibits the application of pesticide in a manner that damages neighboring property, and the State has cited Paynesville for violating this rule in the past.)

Now that it appears that the legal matters are settled–the Johnsons’ choice to go organic does not impose restrictions on how Paynesville operates–Coasian thinking would have us expect the least-cost avoider to take steps to minimized the costs associated with pesticide drift. I can imagine several possibilities, but have no idea which would be least cost:

  • Johnsons pay Paynesville to exercise greater caution to avoid pesticide drift.
  • Johnsons expand their buffer zone between the organic crops and the Paynesville property.
  • Johnsons simply suffer occasional pesticide drift and attendant costs.
  • Johnsons return to conventional farming on their property.
  • Johnsons sell and relocate their organic farm elsewhere.
  • Johnsons buy out Paynesville (i.e. Paynesville relocates its conventional farm elsewhere).

Because this is a case in which the number of parties is small on each side of the externality, the costs of negotiation should be small and so ‘transactions costs’ ought not be a barrier to obtaining the least cost solution. Of course if the least cost adjustment is fully in the Johnsons’ control then it will not require negotiation at all.

NOTES: The first link above includes a summary of the case and links to related documents including the Johnsons’ appeal to the U.S. Supreme Court. The Johnsons’ appeal includes a lengthy appendix with the text of the Minnesota court decisions.

Lynne and I have each written about this case before: Lynne here, and me here and here.]

Hoffman on price gouging (in which I take on claims made in a 7-year old blog post)

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While seeking out the guns and ammo price gouging post at Mother Jones (see link here) I came across a post-Katrina 2005 Political Mojo post by Bradford Plumer on price gouging that I don’t recall having seen before, and it provides a link to a Dave Hoffman post-Katrina post at PrawfsBlawg that actually advances some empirical claims in favor of state anti-price gouging laws. Most advocates of state price gouging controls rely on arguments that come down to “I don’t think it is fair so those sellers shouldn’t be able to do it.”

(ASIDE: There is an empirical claim embedded there too – whether or not the advocate actually thinks post-emergency price increases are unfair – but the feelings of editorialists are not normally significant factors in formal policy analysis.)

Here are a few of Hoffman’s more substantive claims:

  1. “In civil emergencies, markets don’t work to clear information in rational ways.”
  2. “High prices will not serve to reduce demand for, say, water and gasoline, over the short term if folks think their lives are going to depend on having such commodities nearby.”
  3. “Price gouging regulations do two things to reduce panic and regulate demand.  First, they increase trust in market transactions (an SEC-like role) and thus will act to reduce “panic demand” in emergencies without increasing price.”
  4. “Second, the regulations – when publicized appropriately – have the same information forcing effect as higher prices themselves, teaching people that there are supply interruptions and they should change their use patterns until conditions improve.”

My responses:

1. Claim #1 depends on what he means by “rational,” but my expectation is that prices do the same work of helping coordinate buyers and sellers during emergencies as before and after. Yes it is true that during times of quick changes in conditions that more of those prices may turn out to be “wrong” in the sense of too high or too low, but the pre-emergency price is almost assuredly wrong in this same sense and so will likely guarantee that outcomes won’t achieve his rationality standard however he chooses to define that term.

In any case, with a manageable definition of “rationality,” we could explore empirically whether freely-adjusting prices do better or worse than alternative price rules in helping to better clear information rationally. (By “clear information in rational ways” I take Hoffman to be referring to the market’s imperfect-but-still-normally-useful ability to reveal where goods are most highly needed.)

2. It is absolutely true that when it comes to cases in which our lives hang in the balance, consumers will do things that would otherwise be crazy. Would you pay $100 for a bottle of water? Normally no, but if I would die without it then yes. (And if I were about to die for lack of water, I should probably go to the emergency room, not the supermarket. The irony, of course, is that the emergency room would charge $100 to provide the water.)

As an empirical claim about consumer behavior, at least with respect to almost all market transactions during civil emergencies covered by price gouging laws, I’d say he is wrong but at least this is potentially testable. But to the extent we are talking about life and death, I’d say the relevance of his point to price gouging policy is essentially nil. A hurricane hits the Gulf Coast and suddenly state officials in New York and Massachusetts are warning gasoline retailers not to use the hurricane as an excuse to raise prices excessively. No New Yorker is going to die from a Gulf Coast hurricane because gasoline prices on Long Island jumped from $3.50 to $4.75 for a few days.

Of the millions of retail transactions conducted under activated state price gouging regulations, my guess is that fewer than 0.01 of a percent of them involved life and death. In the actual post-emergency retail sales covered by most price gouging laws consumers are quite capable of weighing whether they need four days of bottled water or fourteen,  whether they really need to top off a nearly full gasoline tank again, and if they can get by with two batteries instead of eight, and so on.

3. The empirical claim suggested by standard economics seems contrary to Hoffman’s claim on panic buying. Since emergencies are times of heightened demand and limited supply, some panic demand and hoarding behavior is typical. Artificially low prices are more likely to result in shortages, therefore are more likely to prompt consumers to rush to stock up on supplies. Price gouging controls, in this standard economics story, promote “panic buying.” Two things that would reduce panic buying: (a) consumer confidence that stores will not run out of goods, and/or (b) belief that prices will tend to fall rather than increase over the next few days.

It might be the case that with price gouging laws on the books a consumer doesn’t have to worry about unjustified price increases, but I don’t see the connection between added trust in the market and a consumer’s decision to stock up on supplies right away rather than later. I feel like I must be missing Hoffman’s point.

4. The claim that publicized price gouging enforcement will yield the same kind of “forcing effect” of higher prices, i.e. induce equivalent conservation of newly scarcer goods and services, is eminently testable. The comparable situation in electric power might by those hot summer afternoons during which the utility (mayor, governor, etc.) calls on power consumers to help protect system reliability by voluntarily cutting demand. These voluntary calls for conservation work in the strict technical sense that some people will reduce their consumption. But compare the response rate to that among power consumers with a direct economic incentive to cut back consumption during these power system emergencies, and I’m sure publicizing emergency conditions has nothing at all like the same kind of “forcing effect” as simple economic incentives.

And, of course, it is simply not possible that, say, Governor Christie’s disaster declaration could contain all of the necessary information about which goods are now going to become how-much-more scarce in which parts of the state for how long, and how much one consumer’s needs should weigh against another consumer’s needs, etc.

Hoffman declares his motives in his concluding paragraph: “I dislike folks who intentionally profit on others’ misfortune.” Personally, I’m not so worried about intentions and I’m not  worried about degree of profits. I simply want to support public policies that are best at helping people in distress get useful goods and services at reasonable terms and conditions.

Now, of course, Hoffman is for helping people in distress just like I’m for helping people in distress. The debate here isn’t which one of us secretly hates puppies, but rather which policies will work best for the people affected by emergencies. My empirical claim is that normal public policies towards retailers and pricing do a better job in helping people in distress than anti-price gouging laws do.

ALSO: See Hoffman’s follow-up post, still from September 2005, in which he reacts to some of the comments to his first piece. I now notice that some of those 7+ year old comments beat me to the punch on points I’ve made above. Hoffman suggests the ‘hotel problem’ is more interesting than the gasoline station problem. Here is my ‘hotel problem’ price gouging argument: Hotel rate price gouging during snowstorms can promote public safety.

Would five EPA commissioners be better than one EPA administrator?

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Michael Giberson

Steven Hayward makes the unremarkable observation that the EPA is politicized followed by the somewhat surprising recommendation to fix things by adding more political appointees at the top! He recommends a five-person commission structure within which no more than three are of the same party affiliation, similar to the arrangement governing the Federal Energy Regulatory Commission, the Federal Trade Commission, the Securities and Exchange Commission, and several other regulatory agencies.

Hayward explains, “The EPA’s single-administrator model … is based on what amounts to a conceit that some policy matters are beyond politics or meaningful controversy. This is the apotheosis of the Progressive Era ideal, or rather myth, of enlightened administration by neutral experts. It is also a tactic to deny that what are deeply political administrative decisions are in fact political.” As Hayward points out, a virtue of a multi-member commission over a single administrator is the opportunity for diverse points of view to be represented at the top and for minority views to get public airing.

New Yorkers didn’t ‘share the pain’ of higher gasoline prices during emergency

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Michael Giberson

One idea advanced by proponents of anti-price gouging laws is that after disaster strikes people should put aside their usual self-interests, join in with the community, and share in the burden of recovery. What these proponents often miss is that normal market adjustments will support a sharing in the burden of recovery, even among those lacking much in the way of charitable impulses, when prices are relatively free to adjust.

Prices go up in the disaster zone, supplies are diverted from elsewhere, prices go up elsewhere, people elsewhere cut back a little in response to higher prices, and there we have it: sharing the pain. Adam Smith’s “invisible hand” is a helping hand to those in need.

But the actions of the “invisible hand” were constrained by the very visible hand of the state. In both New York and New Jersey state officials were prominently threatening to slap businesses with thousands of dollars in fines if prices went up too much. Prices did go up a bit in the disaster struck area, but not enough to prompt extraordinary efforts from elsewhere. New York saw none of that normal, voluntary response to changing supply and demand conditions elsewhere, and post-disaster sacrifices remained concentrated mostly in the hardest hit areas.

Consider the price chart below, which shows regular gasoline prices in Albany, Buffalo, and New York City, all in New York State, from June of 2011 through the end of November 2012. Typically these prices move up and down together with just a little localized variation. Beginning at the end of October 2012, during Sandy and its aftermath, prices in the New York City moved sharply higher for nearly two weeks. In New York state outside the disaster-struck area, however, gasoline prices barely slowed their descent from late summer highs.

18_months_of_NY_pricesGasoline lines? Odd-even rationing? Gasoline stations pumped dry? Yes, but only around the power-out, flooded-out, storm-struck area.

Elsewhere in the state: business as usual but for the occasional invitation to chip in $10 to the Red Cross.

ROCKETS AND FEATHERS NOTE: Interestingly, Buffalo prices pretty consistently show a slower price descent when prices are falling than either New York City or Albany. I recall that at the end of 2008 a Buffalo-area Congressman was complaining about the same thing. See here and here. The second half of 2008 was a time of fairly consistently falling gasoline prices throughout the U.S., interrupted only by a short lived mid-September price spike due to Hurricane Ike. Gasoline price researchers, start your engines.

Another round of price gouging charges in New York

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Michael Giberson

The New York Attorney General’s office continues its aggressive pursuit of price gouging violations, announcing another 12 cases last week. From the press release:

“Our office will continue to take enforcement actions against price gougers because ripping off New Yorkers is against the law,” Attorney General Schneiderman said. “We are actively investigating the hundreds of complaints we’ve received from consumers of businesses preying on victims of Hurricane Sandy. There must be no tolerance for unscrupulous individuals who take advantage of New Yorkers trying to rebuild their lives.”

… Among the current batch of 12 enforcement targets is a Mobil station at 3424 East Tremont Avenue in the Bronx where a consumer waiting in line for over an hour was just three cars from the pump when she was told that she would be charged $50 for five gallons of gasoline – $10 per gallon. In contrast, stations nearby were charging $3.95 a gallon.

At a second station, the Coastal station at 1575 Route 112 in Port Jefferson Station, a consumer reported being charged $4.69 per gallon of gasoline while neighboring stations were charging between $3.69 and $4.05. One consumer waited in line for over an hour and did not see a sign detailing prices until after the attendant began pumping gas for the customer.

The 12 stations charged with price gouging are branded: Coastal, BP, Liberty, Ultra, Rio, Getty, Gulf, Shell, Sunoco, Mobil (3). Charged in the earlier 13 price gouging cases were: The 13 gasoline stations are branded: Shell (3), Mobile (4), USA Petroleum (2), Babylon Gas/Express Market, Sonomax, Delta, and Getty.

In New Jersey seven gas stations have been charged with price gouging, with the following brand names: Lukoil (2), Gulf, Delta, Exxon, BP, and Sunoco.

New Jersey moves rapidly on price gouging investigations

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Michael Giberson

NJ OAG post-Sandy price gouging complaint charts

Click image to see NJ AG press release and larger versions of the graphics above.

Something new in the realm of price gouging law enforcement: speedy action.

Frequently states begin investigations of consumer complaints only after the emergency is over, conclude investigations months later, and then begin negotiating some sort of settlement with accused stations. You may recall that New Jersey only finally reached a conclusion in its single post-Hurricane Irene price gouging case over a year after the storm struck. The state only initiated the complaint against the gasoline station in mid-December of last year, about three months after the storm.

So Friday’s announcement of eight price gouging complaints by the New Jersey Office of the Attorney General was something of a surprise.

The press release includes links to all eight complaints for the interested reader, each including details on the alleged violations. Apparently as early as November 1 investigators for the state were visiting retail gasoline stations in response to consumer complaints. These eight complaints–seven gasoline retailers and a hotel–represent among them a bit less than 200 of the approximately 2000 complaints that the state has received.

Mark Thoma on price gouging

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Michael Giberson

At Fiscal Times, economist Mark Thoma discusses price gouging and fairness and capitalism. I hoped Thoma had provided the thoughtful defense of price gouging restrictions that John Carney was looking for. Thoma didn’t really–he had a weightier topic in mind and price gouging was just a lever he used to pry open the issue. But he covers enough on price gouging to be worth taking a look at.

With long gas lines and other shortages putting people on edge in the wake of Hurricane Sandy, the usual post-disaster debate over the economics and ethics of price-gouging is underway…

Thoma explains the usual economist’s views: extraordinary prices can motivate extraordinary supply efforts and help allocate goods efficiently, though he omits the demand side rationing benefits usually part of this explanation. Then, allowing the efficiency gains, Thoma wonders why merchants usually don’t raise prices a lot, and why we have laws against efficient responses.

Most of the explanations economists have come up with rely upon the idea of fairness. After a natural disaster, people consider food, water, even goods like gasoline a necessity, and despite attempts by economists to explain that allowing prices to rise is best, they are sensitive to two types of inequities.

First, after a disaster supplies are short, shopping around may be next to impossible, and consumers do not appreciate producers exploiting short-term monopoly power. That’s especially true when they can’t see any obvious way for the higher prices to induce more supply in a reasonable time-frame due to the post-disaster conditions. If consumers feel they are being taken advantage of at a time when they already have enough problems due to the disaster, they might decide to shop elsewhere and this could hurt future sales to the extent that firms will forego price increases.

Second, people do not consider it fair when only the wealthy can get the things they need to ease their troubles. If people have to go without because of an act of god, then everyone should share in the pain. The wealthy should not be able to corner the available supplies of goods and services that are in high demand because of the disaster.

The essay then takes this fairness issue, suggests its importance beyond emergency conditions, and concludes that the endurance of capitalism depends on institutional changes that return us to a less uneven distribution of income. Okay, maybe, but I’ll stick to commenting only on the two price gouging points.

First, it surely seems true that “consumers do not appreciate producers exploiting short-term monopoly power,” the classic citation on this issue being Kahneman, Knetsch, and Thaler, “Fairness as a constraint on profit-seeking,” American Economic Review, 1986. (KKR) Merchants, understanding this aspect of consumer behavior, often fail to raise prices to market clearing levels and shortages and queues are common results.

Of course the thoughtful economic commentator has a response: Not every consumer reacts in this same way. After all, even in the two Canadian cities that KKR surveyed by telephone for the classic article, not everyone thought it unfair of a hardware store to raise the price of snow shovels the morning after a snowstorm. And social welfare would be improved if people were more willing to allow merchants to adjust prices freely after storms.

Second, “people do not consider it fair when only the wealthy can get the things they need … everyone should share in the pain.” The idea that freely adjusting prices will mean “only the wealthy can get the things they need” is obviously rhetorical excess. The U.S. economy is mostly a place where most prices freely move almost all of the time, and yet non-wealthy people get many of the things they need every day.

Even after natural disasters, an amazing number of non-wealthy people manage to survive. Neither Maryland nor Delaware have price gouging laws, did anyone notice the wealthy snapping up all of the gasoline, canned tuna, and bottled water in those states?

And by the way, it turns out that letting prices adjust helps achieve the result that more people share in the pain. Laws prohibiting price gouging tend to keep the pain localized to just where the natural disaster struck. If the price of gasoline in northern New Jersey had shot up by one or two dollars a gallon for a few days, gasoline trucks and rail cars around the middle Atlantic states and the Northeast would have been diverted to the area. Supplies would have flowed into stations in the affected areas that had power, consumers would have eased up on their hoarding and lines would have dwindled. And, and this is the “share the pain” result that Thoma (and Michael Sandel) find important, gasoline prices around the region would have risen in response to the supply shifts.

As it happened, gasoline prices in New Jersey rose an average of about 10 cents a gallon statewide after the storm, but that wasn’t enough to motivate extraordinary responses. Notice in this chart that gasoline prices in Philadelphia (in Pennsylvania but just across the river from New Jersey) resemble prices in Pittsburgh (in Pennsylvania but 300 miles to the west), but usually Philadelphia prices share the same market twists and turns as nearby New Jersey. Whatever happened at the end of September had Philly sharing the pain with New Jerseyans. Superstorm Sandy, on the other hand, with anti-price gouging laws prominently on display courtesy of Gov. Chris Christie, saw no sharing of the pain across the river.

gasprices

The “sharing the pain” issue is examined in Montgomery, Baron, and Weisskopf, “Potential Effects of Proposed Price Gouging Legislation on the Cost and Severity of Gasoline Supply Interruptions,” Journal of Competition Law & Economics, 2007. They estimated that a federal price gouging law would have reduced the flow of goods into areas directly hit by Hurricanes Rita and Katrina and thereby left people there worse off, relatively speaking, and people elsewhere with more stuff.

Yes, maybe people would have their fairness-feelings hurt if prices rose in disaster-struck areas, but just maybe the efficiency gains (i.e., harm more effectively reduced in disaster-struck areas) are worth bruising a few feelings.

[Note: Edited for a few grammatical problems after initial post.-MG]

Thomas Sowell on price gouging

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Michael Giberson

An excerpt from a Thomas Sowell column on price gouging:

Charges of “price gouging” usually arise when prices are significantly higher than what people have been used to….

This raises questions that go to the heart of economics: What are prices for? What role do they play in the economy?

Prices are not just arbitrary numbers plucked out of the air. Nor are the price levels that you happen to be used to any more special or “fair” than other prices that are higher or lower.

What do prices do? They not only allow sellers to recover their costs, they force buyers to restrict how much they demand. More generally, prices cause goods and the resources that produce goods to flow in one direction through the economy rather than in a different direction.

How do “price gouging” and laws against it fit into this?

When either supply or demand changes, prices change. When the law prevents this, as with Florida’s anti-price-gouging laws, that reduces the flow of resources to where they would be most in demand. At the same time, price control reduces the need for the consumer to limit his demands on existing goods and resources….

Among the complaints in Florida is that hotels have raised their prices. One hotel whose rooms normally cost $40 a night now charged $109 a night and another hotel whose rooms likewise normally cost $40 a night now charged $160 a night.

Those who are long on indignation and short on economics may say that these hotels were now “charging all that the traffic will bear.” But they were probably charging all that the traffic would bear when such hotels were charging $40 a night.

The real question is: Why will the traffic bear more now? Obviously because supply and demand have both changed. Since both homes and hotels have been damaged or destroyed by the hurricanes, there are now more people seeking more rooms from fewer hotels.

What if prices were frozen where they were before all this happened?

Those who got to the hotel first would fill up the rooms and those who got there later would be out of luck — and perhaps out of doors or out of the community. At higher prices, a family that might have rented one room for the parents and another for the children will now double up in just one room because of the “exorbitant” prices. That leaves another room for someone else.

Someone whose home was damaged, but not destroyed, may decide to stay home and make do in less than ideal conditions, rather than pay the higher prices at the local hotel. That too will leave another room for someone whose home was damaged worse or destroyed.

In short, the new prices make as much economic sense under the new conditions as the old prices made under the old conditions.

It is essentially the same story when stores are selling ice, plywood, gasoline, or other things for prices that reflect today’s supply and demand, rather than yesterday’s supply and demand.

As it happens, Sowell’s column was first published in September 2004, after Hurricanes Charley and Frances had struck Florida. It applies as well today in New Jersey and New York.

If you’d like a second opinion, check out Steve Horwitz’s piece at the Institute of Economic Affairs blog: “Why prices should be allowed to rise after a disaster.”

ADDED: And in other news, “Gas Shortage Persists In New York, New Jersey, Contrary To Promises From Officials.”