A Lukewarm Counterattack on Price Gouging
How Solid is the Case for Price Gouging?
Price gouging—i.e., charging desperate people unusually exorbitant prices, often during an emergency—is a hill that many libertarian-types are keyed up to die on. Few things are more tempting for econ dorks (like me) and die-hard libertarians than showcasing how our atypical psychology provides us with an otherwise unreachable gateway to counterintuitive insights through impolitic logic. And price gouging is an ideal situation for such ruthless application of economic reasoning to really shine: the economic principles at stake are both vital and abnormally well-founded, plus the relevant pro-social intuitions push strongly in the opposing direction.
even quipped that the issue makes for an effective IQ test:
This isn’t totally fair: figuring out—without any economics schooling or didactic libertarian buddies—that price gouging might actually be a good thing, strikes me as a tall order for a psychologically normal person, even if they’re pretty intelligent. Either way, the homines oeconomici (soulless, hyper-rational econ nerds) have a point, and Chris Freiman’s recent post does an admirable job of swiftly outlining the libertarian case in favor of price gouging.
The primary justification turns on a fundamental insight of economics that allowing markets to determine price fluctuations will incorporate useful information about the preferences of market participants into those prices, permitting the unguided economy to allocate resources efficiently in a decentralized manner (i.e., by an invisible hand). Trying to efficiently coordinate the economy from the top down is invariably disastrous (cf., our future AI overlords). And price gouging is a nice illustration of how this stuff works. As Freiman points out, allowing the prices to skyrocket generates desirable incentives:
it provides incentives to conserve the existing supply of the good and to bring about new supply. For instance, if a water bottle is $10, you’ll buy a bottle to drink but not to style your hair (thereby sparing a bottle for someone else who is thirsty). Plus, if you can buy a case of water bottles for $10 at Walmart and then drive them to a disaster site where you can sell each bottle for $10, you’re more likely to get off your couch and bring some water to those who need it than if you can only sell each bottle for 50 cents.
So, price gouging is really a counterintuitive solution to the very crises provoking such emotionally charged analysis from the anti-gougers… right? Well, maybe. But perhaps the issue is more nuanced than that. I suppose I’ll risk outing myself as low-IQ here and offer some (half-hearted) defensive spadework for the anti-price-gouging crowd.
Markets, Prices, and Supplies
Firstly, this utilitarian defense of price gouging relies on the theory that price spikes will invite an influx of supply, but these price-gouging situations are characterized, by definition, as beset with artificially constricted supply—they’re aberrations from ordinary market conditions: scenarios conducive to price gouging arise, in some part, because prices won’t function normally. A snowbound city faces a supply shortage precisely because suppliers can’t deliver new goods despite their anticipated profitability, so recommending that these folks leverage budgetary promiscuity to entice greater supply kind of misses the point if they’re shorthanded due to being closed off from receiving new provisions. Ultimately, for the free-market argument for price gouging to cut ice, the pricing information needs to propagate to would-be suppliers, and those suppliers must be capable of usefully reacting to those incentives within a helpful timeframe, and price-gouging scenarios are not guaranteed to satisfy those criteria.
The spectre of inequality also haunts price gouging hypotheticals, particularly if you hold inventories as static over the relevant crisis period. Consider the claim supra that high prices would ensure proper usage of vital goods during emergencies. Is that true? This logic largely checks out for an egalitarian community, but because of the diminishing marginal value of wealth, a billionaire might care less about $100 than others care about $10. Therefore, contra Freiman, it’s straightforwardly imaginable that using a free market to allocate scarce resources in a crises might result in some selfish tycoon using would-be drinking water to draw himself a bath. Again, this wouldn’t be problematic if suppliers could expeditiously react to that tycoon’s splurging, but if the potential for price gouging is in play because of artificially constrained supply over the short run, then the probability of unsavory market-based outcomes increases, and it’s understandable why some might entertain ideas like rationing or a lottery system once production of new supply is effectively sidelined.
Some libertarians would probably dispute the very notion of a supply freeze; in the Atlas-Shrugged-style fantasy world that some claim we inhabit, basically no expedition in history could have perished from lack of supplies because, logically, they’d be sitting ducks for some enterprising John-Galt-wannabe to price-gouge them, even if he needed to invent the airplane to do it. There is a certain misplaced faith among these people that, with just the correct profit motive, a talented entrepreneur might suspend the very laws of physics.
In fairness, it’s true that a gamut of scenarios are possible, and a completely ossified supply is atypical. More frequently, price-gouging situations resemble those detailed in this old EconTalk episode, where during the aftermath of an unexpectedly severe hurricane, guys from a neighboring town were stupidly prevented from selling some ultra-pricey bags of ice, which they doubtlessly financed and rushed over in search of a juicy profit.1 Perhaps we should just be more choosy about our verbiage and define price gouging based on sclerotic market dynamics rather than eye-watering prices.
Distinguishing Morality and Legality
Libertarians also seem to intermix the pertinent moral and legal aspects of price gouging. Freiman repeatedly characterizes price gouging as “permissible,” but that’s ambiguous: (should be) legally permissible or (is) morally permissible? He tries to rectify the ambiguity:
Something to say in its favor is that it seems wrong to force someone off their couch to acquire and transport water to a disaster site. It may be morally wrong to stay on your couch, but simply because something is morally wrong doesn’t mean the state can force you to do it.
But the arguments for why price gouging ought to be legally permissible usually involve parsing its morality, so I’m uncertain whether there’s such a clean division here.
Freiman presents (and questions) a libertarian argument that because it’s permissible for a hypothetical price-gouger to forgo offering supplies altogether, then, a fortiori, it’s permissible for him to offer expensive supplies. To most non-libertarians, the premise that it’s morally permissible to withhold aid during a humanitarian crisis is straightforwardly implausible. Freiman clarifies, however, that even if you’re morally obligated to be helpful, people dislike legally codifying such moral duties and making helpfulness legally obligatory. Fair enough, but the prohibitions of price gouging (which, to be clear, I agree are plainly dumb) are proscribing something and not conferring a positive legal obligation to act—they forbid selling goods at elevated prices rather than demand that you supply them at reasonable ones—so they’re not a member of that unlikable species of statue anyway, and it’s unclear what justifies the transmogrification. If such an argument were sound, wouldn’t it defeat any apparent obligation S to do X (a potentially good act) reasonably unless S was legally obligated to X? This seems too strong.
Furthermore, libertarians sometimes appear to go much further than merely claiming that price gouging is a shoddy behavior that should be legalized on the basis that affirmative legal obligations to be helpful are unpopular, and arguments for legalizing price gouging specifically aim at overturning dogmatic presumptions about its wrongfulness by highlighting its desirable effects. So, we agree the anti-price-gouging laws are unwise: the interesting question is whether price gouging is immoral, and I’m doubtful that the strategy of tackling price gouging like many people view abortion—legally allowable but morally verboten—is a defensible posture.
Do Libertarians Prove Too Much?
Accepting the libertarian’s market-oriented case might prove too much. Suppose that in the aftermath of a disaster, Alice has some extra supplies and could gouge people, but she instead chooses to charge whatever she originally paid. If price gouging provides such important corrective incentives, how can an act of kindness or charity like this be tolerated during a crisis? If forbidding gouging destroys valuable pricing information, then so would people merely choosing not to gouge. The same arguments that show prices shouldn’t be artificially lowered likewise prove that they should invariably be made as high as possible. Thus, libertarians aren’t arguing that price gouging is morally permissible; they’re arguing that it’s morally required—a velociraptor in wolf’s clothing. Are they willing to go so far? Perhaps it’s a silly question to ask of libertarians, who famously take everything too far, but it’s worth others contemplating, even if you recognize the utility of markets and prices.
It could be tempting to dismiss the charitable actions of one sole gouging-defector as de minimis among the overall market, but remember that price-gouging markets are, by definition, low-traffic and unstable, so it shouldn’t require many acts of merciful pricing to frustrate the celebrated incentivization. I’m partly convinced this reasoning is accurate under certain conditions, but for many folks, such a conclusion—that you’re morally required to, say, squeeze desperate neighbors for every penny possible—could be so morally counterintitutive that it verges on constituting a reductio ad absudum disproof of the whole pro-market-price-gouging apologia. Either way, it should inspire more nuanced and cautious thinking on the topic.
In summary, maybe charging desperate people exorbitant prices isn’t the unmitigated normative slam dunk that we’re supposing, even if reflexively and ham-handedly banning price gouging across all situations is foolish and counterproductive. While the underlying economic ideas motivating libertarian confidence about price gouging (viz., leveraging markets, prices, and incentives to organize resource allocation) are on solid ground, the philosophical implications are surprisingly demanding.
In that EconTalk episode, Mike Munger mentions the problem of nonadjustable supply (apparently Tyler Cowen has written about it) and claims that anti-price-gouging laws are unneeded in disaster situations with fixed supply, seemingly because close-knit settings elicit charitable instincts and reputational considerations, but I’m unsure that supply fixity perfectly correlates with camaraderie like that.
>If price gouging provides such important corrective incentives, how can an act of kindness or charity like this be tolerated during a crisis? If forbidding gouging destroys valuable pricing information, then so would people merely choosing not to gouge.
This seems trivially answerable. If Alice gives away (or sells at below what the market will bear) her product, then the recipients have a corresponding incentive to resell at the market-clearing price! If they don't do that, there's no law of classical or neoclassical economics that falsifies their revealed inframarginal preference for the product over the market-clearing price, even if before receiving Alice's gift they were too poor to pay that price in the first place.
>A snowbound city faces a supply shortage precisely because suppliers can’t deliver new goods despite their anticipated profitability, so recommending that these folks leverage budgetary promiscuity to entice greater supply kind of misses the point if they’re shorthanded due to being closed off from receiving new provisions. Ultimately, for the free-market argument for price gouging to cut ice, the pricing information needs to propagate to would-be suppliers, and those suppliers must be capable of usefully reacting to those incentives within a helpful timeframe, and price-gouging scenarios are not guaranteed to satisfy those criteria.
This is a good argument against an ideological commitment to price-gouging being invariantly good under all conditions, but - as you admit later on in the essay - not a good explanation for the actually demonstrated opposition to "price-gouging," since people frequently are upset by it in cases where this condition does not hold. For any activity X, criticizing rigid ideological commitments to support X has to be a legitimate activity, but it's not legit to falsely conflate it with an explanation of a very different social basis for opposition to X.
I think you might be getting confused by inauthentic claims that "price gouging" as the term is used in practice is a natural descriptive category. When I look at what people apparently independently motivated to complain about "price gouging" say (distinct from people like you trying to explain an existing social phenomenon from the outside) when asked for an explanation, it generally adds up to, "it's price gouging when I'm upset about it." So in practice, it's "supply and demand" when we want to normalize it, and it's "price gouging" when we see an uncorrelated behavior that we think we can scapegoat and thereby score some sort of credibility within mob scapegoating dynamics.
If you want to redraw category boundaries in a way that better reflects classical economic prudence, you can either claim that the current (descriptivist) boundaries of "price gouging" are dishonest (if there's evidence of an original usage that was more principled in the way you like), or you might come up with a new term to describe the new category you care about.