Praise for Price-Gouging

Kamala Harris’ policy speech on Friday seems to have ignited a debate about “price gouging,” and what the government should do about it.

We should praise price-gouging. Yes, pass a new federal law, one that overrides the many state laws against price gouging.

What is price gouging and how could I possibly say that? The classic case of “price gouging” happens in a natural disaster or pandemic. A hurricane is coming, people run down to hardwares stores and clean out the 4’x8’ plywood to board up their windows. Stores raise their prices, people who have them sell at high prices to those that don’t. After the storm, gas trucks can’t get in for a few days. Gas stations raise prices to $10 per gallon. In the pandemic, people got worried about toilet paper and went out to buy, cleaning out shelves. Stores that raised prices were accused of “gouging.”

Price gouging is fundamentally different from monopoly pricing, collusion, or price-fixing. Price gouging happens in perfectly competitive markets. There suddenly isn’t enough to go around, either from a surge in demand or a contraction in supply. Prices rise sharply above what people are used to paying. Those that have inventories, bought when prices were lower, can turn around and make a temporary profit. VP Harris calls for a new law against “gouging,” because price fixing is already illegal, and it’s abundantly clear grocery stores are not doing it.

Price gouging is wonderful for all the reasons that letting supply equals demand is wonderful. When there is a limited supply, then a sharply higher price directs that supply to those who really need it. It’s day 2 after the hurricane. Who really needs gas? An ambulance, police, or fire truck? A handicapped person, needing to get to a doctor across town? Or someone who could bike, take public transit, or walk with just a little effort to go see a friend?

Hoarding goes with price controls, anticipated empty shelves. Why did people buy tons of toilet paper in the pandemic? They were worried about not being able to get it in the future. If the stores had not been worried about price-gouging, they would have raised the prices a lot more, and people with that idea would have gotten the message, don’t bother to stock up now — and if you really need it, there will always be some in the store later.

Laws limiting price gouging also reduce supply. If gas goes to $10 per gallon, there is a huge incentive for anyone to has a gas truck to fire it up, buy some gas out in the sticks, bring it in and sell it to local gas stations. If you can’t sell it for a good price, and the gas station can’t recoup that price, it doesn’t happen.

Supplies interact. A truck bringing in food really should get some of the available gas. But if a price-gouging limit on gas means that truck can’t get gas, then it can’t bring in food either. A price-gouging limit on food means the truck can’t afford the gas.

Inventory is a great source of supply. If you run a Home Depot in Florida, how many 4’x8’ sheets of plywood do you keep around? Well, if you’re allowed to sell them for $100 each when the next hurricane is coming, a lot. If you must charge only the regular price until the shelves empty out, then not so much. Inventory is expensive.

“Windfall” profits belong in the pantheon of saints along with price-gouging. In competitive industries, that’s what encourages people to enter and offer new supply.

Price gouging directs scarce supply to the people who really need it, encourages new supply to come in, encourages holding stockpiles for a rainy day, encourages efficient use of stockpiles we have sitting around, and encourages people to substitute for less scarce goods when they can.

Anti-price gouging efforts also target resellers. Suppose you have 20 4’x8’ plywood sheets in your basement, waiting for that big remodel. In the day before the hurricane, put them on eBay, or just outside the front of the garage, for $100 each. That way someone else gets to save their house. Not if the cops are going to come arrest you for it.

But whatabout people who can’t “afford” $10 gas and just have to get, say, to work? Rule number one of economics is, don’t distort prices in order to transfer income. First, take a breath. In the big scheme of things, even a month of having to pay $10 for gas is not a huge change in the distribution of lifetime resources available to people. “Afford” is a squishy concept. You say you can’t afford $100 to fill your tank. But if I offer to sell you a Porsche for $100 you might suddenly be able to “afford” it.

But more deeply, if distributional consequences of a shock are important, then hand out cash. So long as everyone faces the same prices. Give everyone $100 to “pay for gas.” But let them keep the $100 or spend it on something else if they look at the $10 price of gas and decide it’s worth inconvenient substitutes like car pooling, public transit, bicycles, nor not going, and using the money on something else instead.

This is, mostly, what our government did during covid. There was a lot of noise about price gouging then too, but by and large the government just handed out checks so everyone could pay higher prices. (With the exception of rental housing.) We got inflation, but we did not get the devastation that would have been caused by price controls and rationing.

Yes, rationing. Nobody likes “price gouging,” but choices are always between alternatives. How else but higher prices are we going to decide who gets the short supply? The alternative to rationing by price is rationing by waiting in line, or by political preference. Or by who you know.

Paying higher prices is a reduction in your real income, and nobody likes that. But with less to go around, our collective real income is lower, no matter what the government does about it. The government can only transfer resources, not create them. And all the fixes to price gouging make the shortage worse, by discouraging people to cut back on demand or bring in new supplies.

Yet the cultural and moral disapproval of price gouging is strong. Going back thousands of years, people (and theologians) have felt that charging more than whatever they had gotten accustomed to is immoral, especially if the merchant happened to have an inventory purchased in an earlier time. This “just price” moral feeling surely motivates a lot of the anti price-gouging campaign. Economics has only understood how virtuous price gouging is in the last 250 years.

Indeed, companies are very reluctant to price-gouge. Costco let the shelves run out of toilet paper rather than raise pries. Other stores rationed: you can only have 4 rolls — no matter if the cupboard is bare and you have a house of 8 people with diarrhea or you’re just stocking up your summer house just in case. Their reluctance goes way beyond laws. To some extent they are afraid of being housed by politicians, short of actual legal trouble. But price gouging is terrible PR. And to some extent for good reasons. Stores want a reputation for buying cheaply and passing on the low cost to the customer.

As much as the US is the land of free markets — an it is, culturally, compared to other places — we have a ways to go in our cultural acceptance of market behavior. It should be, “you’re free to charge what you want for your property, and I’m free to not buy. Everybody stop whining.” It is not.

Uber surge pricing was an important lesson to me. I loved it. I could always get a car if I really needed one, and I could see how much extra I was paying and decide if I didn’t need it. I was grateful that Uber let me pay other people to postpone their trip for a while, and send a loud signal that more drivers are needed. But drivers reported that everyone else hated it and felt cheated.

This cultural and moral disapproval came home to me strongly about 25 years ago. We were driving from Chicago to Boston in our minivan, with 4 young children, dog, and my mother. We got to upstate NY, and needed to stop for the night. This was before cell phones and the internet, so the common thing to do was just pull of at a big freeway intersection, marked food, phone, gas, lodging, and see what’s available. Nothing. We tried hotel after hotel. We asked them to call around. Nothing. It turns out this was the weekend of Woodstock II. As the evening wore on, the children were turning in to pumpkins. Finally we found a seedy Super-8 motel that had 2 rooms left, for $400. This was back when Super-8 motel rooms were about $50 at most. I said immediately “Thank you, we’ll take them!” My mom was furious. “How dare he charge so much!” I tried hard to explain. “If he charged $50, or $100, those rooms would have been gone long ago and we’d be sleeping in the car tonight. Thank him and be grateful! He’s a struggling immigrant, running a business. We don’t need presents from people who run Super-8s in upstate New York.” But, though an amazing, smart, wise, and well-traveled woman, she wasn’t having it. Nothing I could do would persuade her that the hotel owner wasn’t being terrible in “taking advantage of us.”

It is surely morally worthy to give what you have to your neighbors in time of need, especially the less fortunate. But we should not demand gifts. And appropriation of property by threat of force, turning off the best mechanism we know for alleviating scarcity, does not follow. Moral feelings are a terrible guide for laws

Most politicians just supply what people demand. (A very few lead.) If the culture disapproves, they follow. Supply and demand, cause and effect, logic, evidence and experience be damned.