You should probably raise prices a bit during emergencies

At the Master Resource blog today: “In Defense of Price ‘Gouging’ (lines and shortages are uneconomic, discriminatory).”

In the essay I emphasize the unintended bias that results when consumer demand surges and supplies are tight, as for example when winter storm forecasts lead consumers to rush to the grocery store for bread and milk. Because retailers rarely raise prices in such situations, shortages are the predictable result. The burden of those shortages isn’t spread randomly, however, but rather tends to fall more heavily on certain segments of the population.

When emergencies happen (or are first forecasted) some consumers are readily able to rush to the store while other consumers are not so lucky. The early bird gets the bread and milk and eggs, the late arrival finds little or nothing available….

Households with … “high opportunity costs of shopping,” for example those households with infants or with both parents working full time, were more likely to miss out on the opportunity to buy foods before they ran out. It is easy to see that elderly and mobility-impaired consumers, too, would be more likely to be shut out by any sudden rush of consumers to the store after a disaster.

Higher prices would discourage over-buying and help ensure that useful consumer goods get distributed to more households, not just the households best able to rush to the store.

We can debate how significant the effect is, and I do not argue that raising prices solves all interesting problems, but a modest increase in consumer prices would likely be an improvement.

How about grocery stores imposing a 5 percent storm surcharge that goes to charity, with an ability to opt out? Maybe a sign next to the bread shelves saying “Help those most hurt by the storm: We recommend you donate 25 cents to [name of charity] for every loaf of bread you buy. Our checkout staff will be happy to help you with your donation!”

While I have targeted many complaints at anti-price gouging laws here at Knowledge Problem, in the Master Resource post I broaden my focus a bit to encompass the consumer sentiment against price increases during emergencies. We need a social change to enable markets to work as best they can in such situations. More effective markets aid by reducing the scope of the problems to be addressed by charitable work (as Dwight Lee argues in his essay in Regulation magazine – see the related discussion and link in the Master Resource post).

The quoted part above in part relies on research done on consumer purchases in Japan after the Great East Japan Earthquake of March 2011:  Naohito Abe, Chiaki Moriguchi, and Noriko Inakura, “The Effects of Natural Disasters on Prices and Purchasing Behaviors: The Case of Great East Japan Earthquake.” DP14-1, RCESR Discussion Paper Series, September 2014.

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3 thoughts on “You should probably raise prices a bit during emergencies

  1. Excellent links Michael! I am not sure which link was intended, but both help me. I am simply trying to collect a Coase Club list.

    If you have other resources or known Coasians feel free to let me know.

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