Our thoughts go out to the Texas gulf coast region this weekend as Hurricane Ike bears down. Predictably, talk of price gouging has resurfaced. See Market Power, EclectEcon, and Cafe Hayek. I'll refrain from rehashing what I've said before (see here, here, and here if you're interested). I haven't changed my views that much. Basically it comes down to this:
(1) The price system is useful for allocating goods in disaster areas.
(2) The fact that I believe (1) is true does not mean that I think that people selling bottled water for $5/bottle is a socially optimal outcome.
(3) Big box retailers are able to move mass quantities at a relatively low cost and so can resupply affected areas more efficiently than what frequent commenter spencer calls "guys in pickup trucks". They should be entitled to mark up the goods to recover their costs, but for a variety of reasons they may choose to mark up less than that or not at all.
(4) That (3) is true should be celebrated, but it should be pointed out that (3) does not invalidate (1).
Like I said, for the subtleties read my original posts, but that says it in a nutshell.
But now I would like to tap into another interesting aspect of this problem--the role of information.
For some time, I have been of the opinion that the real problem that underlies the price gouging phenomenon is the lack of information. As a result of the lack of information, arbitrage becomes a risky activity and prices can vary widely across the affected area. This is not an example of efficient markets at work, but it is also not clear that anti-gouging laws are the right way to address the problem.
Phil's post at Market Power comes closest to acknowledging this. In response to a commenter asking where to report gas stations that are price gouging, Phil responds:
It may require a more low-tech solution like a radio broadcast or message boards. But even those may not be realistic in the extreme situations that can result during an evacuation. Can you imagine how things might change if radio broadcasts in a disaster area devoted a few minutes out of every hour to report on where the lowest prices are? Being far from hurricane zones, I don't know--do stations do this already? If so what is the response?
Part of the problem during the evacuations is undoubtedly the fact that people do not know what the price is at the next gas station they will encounter when they see the gas station in front of them has raised their prices. With better information, less panic buying would ensue and there would in turn be less reason for stations to raise their prices so dramatically.
Turning to the aftermath, when people need water, cleaning supplies, chainsaws, generators, and the like, I think a solution is possible. As I have alluded to before, the big-box stores do a good job of getting the supplies to the affected areas. They may raise their prices on some items, not on others, and may even donate some items. This is good. Now consider how these stores contribute to the information available. Everyone knows the names of these stores. Most people live near them. Word gets around fast that the trucks have arrived and supplies are available at a reasonable cost. Information is the key.
Price gouging laws are not the best way to handle the situation because they don't address the real problem. Some people will gouge anyway, hoping that they won't get caught--and invariably many will not get caught. Some people may be erroneously charged with gouging and end up incurring the cost of defending themselves before the law. All the while, the real reason for the dispersion in prices--the lack of information--persists.
Markets, whether at the stock exchange or the corner gas station, work because of the process of price discovery. When price discovery is compromised, bad things happen. Politicians have just chosen the wrong way to go about correcting the problem. Getting better information to consumers about prices is the way to reduce the incentive to gouge.
While private entities may be able to provide this information, there may be a role for government to play as well. That is, if we can get them off the fixation that price gouging laws are the way to go. After all, going after criminals plays better with the voters than setting up an information system. Passing laws makes it look like you're doing something. And if the only tool you have is a hammer, every problem looks like a nail.
(1) The price system is useful for allocating goods in disaster areas.
(2) The fact that I believe (1) is true does not mean that I think that people selling bottled water for $5/bottle is a socially optimal outcome.
(3) Big box retailers are able to move mass quantities at a relatively low cost and so can resupply affected areas more efficiently than what frequent commenter spencer calls "guys in pickup trucks". They should be entitled to mark up the goods to recover their costs, but for a variety of reasons they may choose to mark up less than that or not at all.
(4) That (3) is true should be celebrated, but it should be pointed out that (3) does not invalidate (1).
Like I said, for the subtleties read my original posts, but that says it in a nutshell.
But now I would like to tap into another interesting aspect of this problem--the role of information.
For some time, I have been of the opinion that the real problem that underlies the price gouging phenomenon is the lack of information. As a result of the lack of information, arbitrage becomes a risky activity and prices can vary widely across the affected area. This is not an example of efficient markets at work, but it is also not clear that anti-gouging laws are the right way to address the problem.
Phil's post at Market Power comes closest to acknowledging this. In response to a commenter asking where to report gas stations that are price gouging, Phil responds:
To competitors who are not. They'll be happy to hear it. You might also try reporting it to texasgasprices.com so that customers can be informed. That will do more good than reporting it to some government agency.And while I agree with Phil in spirit, I have my doubts that such reporting will do a lot of good in the heat of battle, when contraflow traffic is bumper-to-bumper on the interstate, the rain is starting to fall, and not everyone has Internet access in their car.
It may require a more low-tech solution like a radio broadcast or message boards. But even those may not be realistic in the extreme situations that can result during an evacuation. Can you imagine how things might change if radio broadcasts in a disaster area devoted a few minutes out of every hour to report on where the lowest prices are? Being far from hurricane zones, I don't know--do stations do this already? If so what is the response?
Part of the problem during the evacuations is undoubtedly the fact that people do not know what the price is at the next gas station they will encounter when they see the gas station in front of them has raised their prices. With better information, less panic buying would ensue and there would in turn be less reason for stations to raise their prices so dramatically.
Turning to the aftermath, when people need water, cleaning supplies, chainsaws, generators, and the like, I think a solution is possible. As I have alluded to before, the big-box stores do a good job of getting the supplies to the affected areas. They may raise their prices on some items, not on others, and may even donate some items. This is good. Now consider how these stores contribute to the information available. Everyone knows the names of these stores. Most people live near them. Word gets around fast that the trucks have arrived and supplies are available at a reasonable cost. Information is the key.
Price gouging laws are not the best way to handle the situation because they don't address the real problem. Some people will gouge anyway, hoping that they won't get caught--and invariably many will not get caught. Some people may be erroneously charged with gouging and end up incurring the cost of defending themselves before the law. All the while, the real reason for the dispersion in prices--the lack of information--persists.
Markets, whether at the stock exchange or the corner gas station, work because of the process of price discovery. When price discovery is compromised, bad things happen. Politicians have just chosen the wrong way to go about correcting the problem. Getting better information to consumers about prices is the way to reduce the incentive to gouge.
While private entities may be able to provide this information, there may be a role for government to play as well. That is, if we can get them off the fixation that price gouging laws are the way to go. After all, going after criminals plays better with the voters than setting up an information system. Passing laws makes it look like you're doing something. And if the only tool you have is a hammer, every problem looks like a nail.
Can economists figure out a way to make parents teach their kids that greed is bad behavior? That will really fix this problem at the source.
I don't know--do stations do this already? If so what is the response?
Having lived in Key West and now Pensacola, I've been through 10+ hurricanes and I've never heard any station do this. More typically, they inform you of any store that has power and gas available, period. After we got wiped out by Ivan, we had to drive 40-50 miles east or west to find gas for the generator sets and frequently there was a volume limit to prevent those maroons who drive up in duallies with 3 55-gallon barrels in the back from filling up. Seen that happen before.
Personally, this economist teaches his kids that lesson.
Professionally, we tend to leave such things to the theologians. Pity.
"More typically, they inform you of any store that has power and gas available, period."
Your point is well taken. Announcing who has supplies available does provide some informational value though not enough to overcome the problems identified here.