By now, we’ve all heard stories about shops selling toilet paper for 10 bucks a roll,
or $70 bottles of hand sanitizer on ebay, and we just boil with outrage.
Is there anything lower than price gouging during a crisis?
I mean, what kind of a monster sees people desperate and fearful and thinks, “Hey,
I can make a killing off this!”
But, you might be surprised to know that there is one group of people who actually think
it’s not such a bad thing.
No, it’s not the gougers themselves… it’s economists.
In 2012, the IGM Forum conducted a poll of over 50 respected economic experts about a
proposed Connecticut law against “price gouging,” and found that only 7% agreed
with it--which is surprising, considering that over two-thirds of states have such laws
on the books.
The wording varies from state to state, but “gouging” is typically defined as raising
prices on essential goods during a disaster or shortage to a level that’s “unfair”,
“excessive” or “unreasonable.”
You might already see why people who deal with numbers all day might have a problem
with this.
How do you quantify “unreasonable”?
What amounts to “unfair”?
Most people would find a 200% increase “excessive,” but some states will punish even a 10-20% hike.
State attorneys general across the country are swamped with complaints about
COVID-related price gouging, and in the last couple weeks, some charges are starting to
be filed.
By the end of March, Amazon had removed over half a million listings and suspended almost
4,000 sellers for “violating [their] fair pricing policies.”
But many economists claim that this reaction does more harm than good.
Prices, they say, are a way of allocating resources to the places where they are valued most,
and that becomes even more important when resources are scarce, like during shortages,
natural disasters, and pandemics.
Imagine that you’re out of toilet paper, so you put on your face mask and rush down
to your corner market and find out that (phew!) they still have a few packs left.
But they’ve raised the price from $2.99 to $6.99!
Even though that’s more than double what you’re used to paying, you really need that
TP, so you fork over the money and storm home, certain that you got hosed.
(Speaking of getting hosed, if you had a bidet you wouldn’t be in this predicament.)
But! says the economist, what you didn’t know was that earlier today your neighbor
Ted visited the same store.
Ted’s a bit of a doomsday prepper and when he heard that toilet paper was in short supply,
he decided to stock up by buying every roll the store had.
That is, until he heard how much it would cost.
Not wanting to blow a week’s wages on TP he didn’t really need, Ted ended up leaving
with only two packs.
So, if it weren’t for that high price, there wouldn’t have been any toilet paper left
for you.
You needed it more than Ted, so the pricing efficiently distributed it to you instead
of him.
Though it may seem unfair, these economists argue that pricing is a better system for
determining who gets what than first-come first-serve or… fisticuffs in the parking lot.
In times of scarcity, high prices discourage hoarding and encourage conservation.
At least, in theory.
In the real world, we do see examples of how gougers exacerbate shortages, like the guy
in Tennessee who famously hoarded 17,000 bottles of hand sanitizer to sell online.
He probably wouldn’t have gone from store to store buying every bottle he could find
if he knew he couldn’t jack up the price.
But economists will claim that even so-called “entrepreneurs” like him serve a function
in times of crisis, by efficiently moving goods from places where they have them to
places where they need them.
For instance, if a hurricane disrupts a town’s water supply, people from other counties will
happily drive truckloads of bottled water to the stricken area--if they’re allowed
to charge prices high enough to make it worth their while.
Eventually, the enticement of big profits will attract so much water that the shortage
will end and prices will normalize.
Again, in theory.
Economists tend to look at big pictures and long timeframes.
It’s a lot harder for a governor in the middle of a disaster to tell citizens:
"I know you can’t afford to feed your family now, but don’t you see?
At some point down the road the market will stabilize!”
That… wouldn’t go over well.
Just because someone can’t afford an inflated price doesn’t necessarily mean they need
the resource less than someone who can.
Yet such people seem to get left out of these equations.
As economist Angus Deaton said in his response to the IGM Forum poll: “Efficiency is less
important than distribution under such… conditions.”
Whether it’s morality or biology, humans seem to have an almost universal conviction
that in times of crisis, everyone should be pulling together to help each other, not looking
for ways to make a buck.
And people who break that code are severely condemned.
Just ask our buddy in Tennessee who received a ton of hate mail and death threats from
his unwanted infamy, and eventually agreed to donate his stockpile to avoid prosecution.
Interestingly, this societal judgment is one of the reasons that economists tend to find
laws against price gouging unnecessary.
In a classic example, if a local hardware store jacks up the price of snow shovels the
day after a blizzard, the townspeople might get angry and punish the store owner by taking
their business elsewhere in the future.
So sellers who care about their reputations already have a powerful motivation not to
seem exploitative or greedy.
While this motivation may not apply to an out-of-state entrepreneur hoping to make a
one-time profit by selling overpriced water, it applies very much to large corporations
who carefully manage their brands.
After being called out for allowing third parties to price gouge on their platforms,
megaretailers like Amazon and Walmart are now bending over backwards to assure their
customers that they don’t cotton to no dirty rotten price gougers.
And major grocery store chains go to great lengths to keep their supply chains operating
during crises so as not to be painted with the dreaded Scarlet G.
As long as big firms keep prices relatively stable, say economists, individual entrepreneurs
should be allowed to fill in the gaps by charging whatever people are willing to pay.
As heartless as economics can sometimes be, I have to admit it’s kind of comforting
that our beliefs about right and wrong are at least a part of the equation!
Right.
So, according to economists, price gouging maybe serves some necessary function, but
the price gougers should still be treated like greedy jerks?
Seems like a paradox, but I guess that’s economics!
Where cold numbers meet warm hearts.
And that’s our two cents!
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