A fool and his money are soon parted. –Thomas Tusser.
Potassium iodide supplies in the United States have run low and the price shoots up. What sold for $10 or $20 dollars a week ago is now priced from $30 to $75 and more. Some cry “price gouging!”
Regulation magazine has just published an article of mine on price gouging policies. Since the Regulation article was finished in January, I didn’t anticipate potassium iodide price gouging in March. My reactions:
Is “price gouging” on potassium iodide in the United States a good thing?
High prices will have the beneficial effect of dissuading some Americans from acquiring and hoarding supplies of a resource that will be better used elsewhere. High prices will have the beneficial effect of prompting some additional production. High prices will have the unfortunate effect of attracting more supplies to the United States when those resources would be better sent elsewhere (i.e. to some of the 3- to 4-billion people living closer than most Americans to the damaged reactors in Japan). Note that Japanese officials are promoting a 12-mile evacuation range around the damaged reactors and the United States is thousands of miles outside the evacuation range.
Of course the appropriate question is “a good thing compared to what”? What is the alternative to allowing suppliers and consumers work out prices in the market? Two alternatives to price gouging are (1) anti-price gouging moralizing and (2) anti-price gouging laws.
Anti-price gouging moralizing discourages useful economic activity because businesses will take steps to avoid being branded a price gouger even when those steps actually make consumers worse off. (I.e. failing to resupply at higher prices and simply running out of stock instead.) Anti-price gouging moralizing also encourages political responses that we’d be better off without, which leads me to the next point:
Would an “anti price gouging law” enforced by federal or state authorities be a good thing?
No. All such a law would have done was minimize the amount of money parted from the fast-acting fools, slower-moving fools would lament their ineptness, less dim-witted fools would not be prompted have second thoughts about hoarding something they didn’t need and no price signal would encourage suppliers to respond.
Note that state laws on price gouging do not apply in this situation, since they typically require an official declaration of emergency, or if not an official declaration, at least some kind of threat of harm to consumers associated with the higher-priced good. There is no related emergency anywhere in the United States.
I’ll post more about the Regulation article here in a day or two. Regular readers will have seen much of the raw material for the article discussed earlier onKnowledge Problem (link searches the KP archives for “price gouging”), but there is new material, too.