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

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.

Mother Jones on guns and ammo price gouging

Michael Giberson

A post at Mother Jones‘s Political Mojo blog sees a silver lining in current price gouging on guns (see “Gun Lovers Freaking Out Over Price Gouging“): “It might help keep sales in check—at least temporarily—while Congress gets around to thinking about thinking about considering an assault-weapon ban.”

Well, technically speaking, current prices and current sales reflect efforts to coordinate supplies during the current short term spike in demand. If someone wanted to actually limit the number of legal sales they should favor a capped low price rather than a market-driven high price.* Currently the high price is motivating a lot of effort to bring more guns to market; a capped low price would do much more to keep sales in check.

*Gun control advocates should note that the effect of a binding price cap would be to promote legal work-arounds (i.e. “we only sell that model with this handy $150 instruction guide”) or simply motivate more dealers to sell on the black market. In the very short run a price cap would lead to shortages, but over time smart people find ways to overcome barriers.

Great strides have been made combating price gougers in Venzuela

Michael Giberson

Venezuela “President” Hugo Chávez  has put his government strongly behind efforts to combat price gouging, which in this context means selling a good for more than the government’s permitted price. The policy has had the usual effects: shortages of ordinary consumer goods and queues reminiscent of Soviet-style communism.

The New York Times reports, “With Venezuelan Food Shortages, Some Blame Price Controls.” Obviously those “some” are greedy capitalists and their economist lackeys, but Chávez isn’t buying into such corrupt and self-serving claims by economic elites. Instead, “[Chávez and his ministers] blame unfettered capitalism for the country’s economic ills and argue that controls are needed to keep prices in check in a country where inflation rose to 27.6 percent last year, one of the highest rates in the world.”

That’s the ticket: the more problems the government creates, the more reasons the government claims it is needed to solve problems.

HT to Paul Walker at Anti-Dismal, who offers a curated selection of quotes from the article.

MORE: A news story from 2010, “Venezuela closes price-gouging shops.”

Zwolinski: “Is price gouging immoral? Should it be illegal?”

Michael Giberson

Five minutes of Matt Zwolinski on price gouging (from Learn Liberty).

If you think price gouging should be against the law, watch this video. Are you persuaded by Zwolinski? Let me know in the comments.

MORE: Zwolinski has written serious philosophical works on price gouging,which makes the clarity of his position in the video all the more surprising. :-)  See links to some of Zwolinski’s work on the topic in previous KP discussions here and here.

Gas price gouging on rise*

Michael Giberson

Gasoline stations are violating price regulations at a higher rate than any other industry under government price guidelines, an Internal Revenue Service survey shows.

About 20% of service stations checked were selling gasoline above the legal ceiling price, the agency said.

Federal energy chief William Simon told The Milwaukee Journal’s Washington Bureau Thursday that the Internal Revenue Service was intensifying its crackdown on price gouging. He said the IRS was training an additional 1,000 investigators – bringing the total number available to the Federal Energy Office (FEO) to about 2,500.

In addition, he urged consumers to complain to their local IRS office whenever they believed they were being overcharged. He said consumers should get receipts from service stations whenever possible so they could receive any refunds that were ordered.

Acting Atty. Gen. Robert Bork sent telegrams to 94 US attorneys last week advising them to seek restraining orders against gasoline price gouging, Simon said.

Most of the violation probably do not involve flagrant price gouging, in which motorists are charged $1 or more for a gallon of gas, an IRS spokesman said. But the number of such serious violations is increasing.

The spokesman said it appeared that an increasing number of gasoline stations were using various gimmicks to get around the government’s price regulations.

*Excerpt from “Gas Price Gouging on Rise,” The Milwaukee Journal, January 2, 1974.

You probably believe that consumers had to wait in long lines to buy gas in the early 1970s because of the OPEC oil embargo. Annual data on imports available from the Energy Information Administration indicate that oil imports from OPEC nations increased each year from 1968 through 1977. (I don’t find monthly data on a cursory search, though it would be more revealing of conditions during the months of the embargo.)

The newspaper clip above reminds us that U.S. government price controls were hampering oil industry adjustments to higher world oil prices and changing supply conditions. A little common sense is all that is needed to realize that consumers don’t stand in line to pay too-high prices, but will stand in line for underpriced goods (whether due to sales promotions or government price controls).

A related story, “Gas stations worst violators” (The Miami News, January 3, 1974), elaborated on gasoline retailers’ adaptations to price controls: “According to the [Federal Energy Office] spokesman, the gimmicks used include service charges for each gallon of gas, requiring consumers to get a car wash along with a full tank of gas, or making them buy other products at inflated prices.”

The rest of The Milwaukee Journal story is included in the continuation below.

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