Price Gouging: Can Economics Justify a Price Cap?

Michael Giberson

A great burst of attention to price gouging economics. When i have a bit more time, I’ll come back to this discussion. But here is my quick surmise:

Even in Ely’s fixed supply situation and following Ely ignoring producer surplus, if you assume a fixed supply of bottled water and a queue of consumers each with a declining marginal utility for bottled water, it is easy to cook up examples in which a price cap mis-distributes water to the first several customers in line.

Cowen is right to point out that even in the short run supply is usually less than perfectly inelastic. In the longer run dynamic effects are also important.

Of course those first lucky customers could re-sell water to the less fortunate folks in the back of the queue … for the right price.

ADDED from newspapers and other media:


And one last blogger, David M. Brown at Mises Daily, “Price Gouging Saves Lives in a Hurricane.” (Which is a recycling of Brown’s post-Hurricane Charley price gouging post.)

4 thoughts on “Price Gouging: Can Economics Justify a Price Cap?

  1. The potential of a price upside creates supply elasticity. The closer a price cap was set to the prevailing price in the market before the crisis, the less elastic supply would be during the crisis. Also, the greater the potential penalties for “gouging” during a crisis, the less elastic supply would be during the crisis. If price is more important than supply, a cap might make sense. However, if supply is more important than price, any cap is counterproductive. Choices have consequences. No buyer is “forced” to pay a price he/she considers “gouging”, even though he/she might be highly motivated to obtain the “good”. No seller, on the other hand, is required to sell at a price which does not both return supply cost and compensate for risk exposure.

  2. No Price Gouging Here
    – We’re Honorable, So We Don’t Have Any Stuff –

    A good effect of “price gouging” is to usefully ration limited supplies. At twice the price, many people will limit their purchases to just cover the emergency, rather than buy up everything they can.

    The worst effect of “no price gouging” is to dissuade companies from planning ahead for emergencies. Existing companies are much more knowledgeable and better positioned to serve the public than emergency teams trying to set up an infrastructure in one or two days.

    Consider a gas station with no emergency electric generator. Why don’t they all have one?

    The generators are expensive to buy, install, and maintain. The station can’t recover these costs in normal times, as they are underbid by stations who don’t incur that expense. The station must rely on much higher prices in emergencies, when they can pump gas and their competitors can’t. But, they can’t charge higher prices in emergencies, so they don’t acquire emergency equipment.

    The same goes for larger gas storage. The station doesn’t need it in normal times. The costs of a larger tank could only be recovered by “price gouging” in emergencies.

    The public attitude toward higher prices in emergencies is shaped by political posturing. The public cannot be protected as long as they are so misled.

  3. Andrew, I’m interested finding the social science in this claim, “The public attitude toward higher prices in emergencies is shaped by political posturing.”

    It seems like it is true, but don’t know enough about how price expectations and politician pronouncements are related. Do people internalized what politicians say deeply enough to produce an emotional reaction against price increases?

    The alternative thought is just that politicians are telling people what the people already want to hear–we’re going to protect you and help restore order in your time of need, blah, blah, ….

    I wonder which direction the causality runs, or maybe rather than one causing the other they are both instances of the same thing: maybe “politicians are people, too!” Meaning, maybe people want social-cultural affirmation that communities will pull together after a crisis, for people in political leadership position this involves saying “we’re going to protect you” and for non-leaders it is the resulting warm fuzzy feeling from seeming to have the government on your side.

    Please note I agree with your economic assessment and don’t actually characterize anti-gouging rhetoric or anti-gouging laws as pro-social. Here I’m just thinking out loud about why political leaders urge to speak out on price gouging, and why (presumably) this is good politics.

  4. Andrew,

    I don’t think “an emotional reaction against price increases” requires much internalization of politicians pronouncements; and, it displays ignorance of basic economics. We appear not to think too much any more, but merely to react.

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