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Price gouging during natural disasters


rukawa
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I don't have a problem with restrictions on markets but I have a big problem when these restrictions could cost lives.

Do you have any metric shown the # of lives lost due to price gouging? Or some way to quantify this to do some type of cost-benefit analysis?

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I don't have a problem with restrictions on markets but I have a big problem when these restrictions could cost lives.

Do you have any metric shown the # of lives lost due to price gouging? Or some way to quantify this to do some type of cost-benefit analysis?

 

I think you misread my comment.

 

Anyways the burden of proof is the other way around...is there any evidence showing that laws against price-gouging save lives or do any good?

 

Anyways we have some evidence that price controls can endanger peoples lives:

https://www.washingtonpost.com/news/global-opinions/wp/2017/06/01/venezuelas-hunger-crisis-is-for-real/?utm_term=.f52590b6a873

 

I think without fail every time a price control below prevailing market prices has been enforced the result is shortages, hoarding and lineups. If that happens with critical things like food and water you get deaths.

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Well i think a distinction needs to be drawn between price gouging in times of an emergency crisis (hurricanes, etc) and price control as the status-quo.

 

You presented the claim that price gouging endangers human life, but offer no evidence aside from an article about price controls in Venezuela.

 

Price controls I think are a bad idea 99% of the time, but price gouging I don't see offering any benefits. But I'm open to being wrong if the evidence is there.

 

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Price gouging. Interesting?

 

Thought I would follow the duel and enjoy/learn.

 

But I wll pitch in.

 

In university, during a power outage, I had a small experience with price gouging in what could be considered a small disaster (need to study for an exam the next day). There was a huge lineup at the local store and the owner had boxes and boxes of batteries and candles which were selling at huge premium. I remember wondering about the moral implications. But, I also had made a mental note to eventually buy a reserve of those necessities in order to prepare/benefit during the next downturn. Maybe, that’s when I became a value investor.  Interesting  to note that the internal moral debate was put aside when I realized I could be on the right side of the trade. Elastic conscience. Dangerous concept. Maybe the invisible hand may need restraint in selected scenarios. No?

 

Anyways, I happen to have a sub-file on the topic which I built when analyzing pawn shop chains (which are prevalent in south US and Mexico). States have variable legislation that “protects” the “vulnerable” consumer against quasi “shark” loan practices and “usurious” interest rates.

 

So, same question, consumer protection versus un-availability of sometimes the only credit option for a not so small segment of the population.

 

Surprisingly, there is a ton of literature on the topic. Like many of these tough questions, there is no truly Right or Wrong answers.

 

Here’s a sample:

 

http://brooklynworks.brooklaw.edu/cgi/viewcontent.cgi?article=1350&context=blr

 

http://facpub.stjohns.edu/~flanagap/3305/readings/Zwolinski_Price_Gouging.pdf

 

https://www2.gwu.edu/~iiep/assets/docs/papers/2015WP/SuranovicIIEPWP2015-20.pdf

 

http://digitalcommons.calpoly.edu/cgi/viewcontent.cgi?article=1473&context=theses

 

http://www.independent.org/pdf/tir/tir_19_04_08_lee.pdf

 

 

So I'll stick my neck out. On this specific question, I am with you rukawa and I submit that the burden of proof is on LC.

 

 

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porcupine,

We are on the same wavelength here but you may question your main premise by reading about what is going on in gas stations after Harvey.

With social media and all, to charge more may in fact contribute to you wanting more of the product.

Scarce product becomes a Veblen good in a way. Interesting. No?

Sometimes the law of demand and supply falls apart.

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I tend to agree with the general sentiment that price gouging laws do more harm than good. However, I think the article only touched on what I view as the best reason for doing away with price gouging laws. In the wake of a disaster when supplies are short, higher prices incentivize people to bring supplies from unaffected areas to affected areas. If someone with a utility trailer in a nearby city can load it up with supplies and sell those supplies for more than they purchased them to willing buyers in the affected region, why is it the government's place to stop this from happening? As more people see the opportunity to bring goods in for a profit, prices will fall. This holds true for the guy with a utility trailer who goes to Home Depot and loads it up with sheets of plywood to resell to homeowners who lost part of their roof and to retailers like Home Depot or Walmart which are incentivized to have a plan in place to deliver supplies to their stores in the affected region as quickly as possible or just sell them off the trailer if they can't open their stores.

 

Affected as much as the reseller or retailer trying to make a profit by raising prices are those living in the affected area who are prevented, by law, from buying what they need at a price they're willing to pay. Let that sink in for a second because I think it's the most important point against price gouging laws, if your roof has a hole where a tree fell on it, how much would you be willing to pay for a couple sheets of plywood and a tarp to prevent further damage from rain and to get a good night's sleep for the next few weeks until a roofer can come fix it? Certainly there's a value to having goods in a disaster zone when you need them that you would be willing to pay that can far exceed the price those same goods might be selling for outside the disaster zone. Capping prices only helps to limit supply in the region, the exact opposite of what needs to happen.

 

Living in S. Fl I'd also say doing away with price gouging laws would encourage a better level of general preparedness for hurricanes rather than the mad rush that occurs in the day or two preceding the storm. If someone knows prices will rise dramatically in the days before a storm, they're more likely to stock up when hurricane season begins or when there isn't a storm looming offshore, eliminating some of the chaos that usually comes in the days preceding a storm. Higher prices for bottled water would also encourage alternative solutions like filling empty water jugs and freezing them.

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One of the problems with applying pure economics to these post hurricane urban disaster zones (I am familiar with them), is that the people suffering / needing supplies in these situations are disproportionately lower income, less affluent people.  So raising prices may encourage one person in line to buy fewer cases of water and completely price out the poor person next in line.  So it becomes no water for poor people, rather than some water for everyone.  I know the 'water sold out everywhere in 5 minutes' scenario is probably just as bad.  And I agree with the basic premise of high prices being the only cure for high prices.

 

Many poor people in New Orleans had never been outside of New Orleans prior to Katrina.  They don't have cars, they don't have money for motel stays.  So they stay.  Slightly more affluent people are much more likely to just leave for a few days.  Also, at least in my city, wealthy people live on high ground and poor people live in less expensive (read: more flood prone) parts of the city.  Real Estate repricing post-Katrina only magnified this dynamic - we call it "the sliver by the river," land that is higher due to centuries of sediment build-up before the levees were put on the Mississippi River.

 

The second part of the originally liked article is also very good - the broken window part.  It rings true except to the extent that federal money that would not otherwise be injected into the economy (think $150 Billion+) gets injected and immediately spent with a very high velocity.  I don't know if that is truly 'new' money entering the system, as in theory the treasury has to borrow it - but in reality you have situations like FEMA / NFIP being tens of billions of dollars "in debt" to the Treasury, and that sounds like it could be a bit more like the $4 Trillion Fed balance sheet - new money, play money, inflation.

 

And of course regionally - right there in Texas - it will be a huge influx of new money and new spending hitting the region.  It will be a huge boom regionally.  It will create shortages for skilled labor that will draw workers away from other states, it will affect the price of gypsum board, etc...  That federal money bonanza and supply-demand imbalance in the contractor market will certainly use those same pure economic principles to draw labor from outside the region.

 

Anyway, it's an interesting article.  In the age of viral social media posts, anyone bigger than a mom-and-pop better be careful with raising prices - just ask Best Buy...

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Well i think a distinction needs to be drawn between price gouging in times of an emergency crisis (hurricanes, etc) and price control as the status-quo.

 

The simplest hypothesis is that there is no difference. What do you think the relevant difference are? I can think of only one: time duration.

 

One of the problems with applying pure economics to these post hurricane urban disaster zones (I am familiar with them), is that the people suffering / needing supplies in these situations are disproportionately lower income, less affluent people.  So raising prices may encourage one person in line to buy fewer cases of water and completely price out the poor person next in line.

 

You could be right. Was that your actual experience? I am curious as to exactly what you saw happening in Katrina since my actual experience of these things is limited.

 

I can see other scenarios. Like the first few people in line buy out all the water and none is left over for anyone else. Its quite possible that high prices result in a more egalitarian distribution than low prices due to the fact that they discourage hoarding.

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Well i think a distinction needs to be drawn between price gouging in times of an emergency crisis (hurricanes, etc) and price control as the status-quo.

 

The simplest hypothesis is that there is no difference. What do you think the relevant difference are? I can think of only one: time duration.

 

Duration is not the only factor. It's unexpected, irregular, and usually occurs in time of crisis. A seasonal demand spike for example would not be price gouging, despite having a potentially similar duration.

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lets invert the problem: why do suppliers continue to sell product at "below market" prices in emergency conditions, when price gouging laws would be in effect? If they were truly rational economic players and could sell water at $99/case, why would they ever stick around at great danger to themselves and sell at $2/case?

 

also, i just read this:

 

and i had the thought, what happens if vendors decide there is no price worth selling to supply necessary items? or as GFP mentioned above, the price is simply way too high for anyone to afford (if the affected area happens to be poverty-stricken)?

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Seems to me the logical response is to allow free market pricing (incentivising profit-seeking players to help solve the problem) and a huge not-for-profit/charity/state push to get supplies into the affected area as well.

 

That way, you get all players helping solve the problem.  If you don't allow free market pricing, profit-seeking players won't raise supply; but this is probably one of (few) scenarios where the free market is not sufficient (it will allocate resources efficiently, but people could die as a result, and from society's point of view that is an example of market failure).

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They say that, when disasters strike, you see the best and unfortunately also the worst traits of human beings.

When worst comes to shove, as one participant of the below linked video says: "There may not be enough love to go around". Need $. Human thing.

 

Gordan Gecko said: "Greed is good"

Three Nobel laureates say: "Price gouging is good"

 

Better "watch out", Rick Perry said a few days ago.

 

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lets invert the problem: why do suppliers continue to sell product at "below market" prices in emergency conditions, when price gouging laws would be in effect? If they were truly rational economic players and could sell water at $99/case, why would they ever stick around at great danger to themselves and sell at $2/case?

 

also, i just read this:

 

and i had the thought, what happens if vendors decide there is no price worth selling to supply necessary items? or as GFP mentioned above, the price is simply way too high for anyone to afford (if the affected area happens to be poverty-stricken)?

 

Good will. Keeping a customer for life is a lot more valuable than making a couple extra bucks during an emergency. There's a reasonable level of price inflation that might be expected with an impending disaster but customers would remember the stores in their neighborhood that tried to make the most off the disaster, and conversely, those who keep their prices low and stay open will also be rewarded with their loyalty when things get back to normal.

 

If prices are really so high that no one can afford them, doesn't that create more incentive for more people to bring goods to market - it's essentially regional arbitrage where goods flow from where they're cheap to where they're expensive until the market reaches equilibrium.

 

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Here's the response to Mankiw's article:

 

http://www.latimes.com/business/hiltzik/la-fi-hiltzik-price-gouging-harvey-20170828-story.html

 

Another argument in favor of removing crisis-stage price controls is that they fail to accommodate the higher cost of getting a scarce commodity such as water or gasoline into the stricken market. That’s a fair point, but it’s also why price-gouging laws typically allow for price increases within a certain limited range, or allow situations where a higher transport or production cost can be documented

 

Another factor commonly overlooked by defenders of price gouging is that natural disasters tend to be (1) short-term and (2) not amenable to rapid response by market forces. If there’s no physical way to get a new supply of bottled water into some part of Houston, then allowing unrestrained price increases won’t produce a larger supply. Retailers lucky enough to have a few cases in the back room when the crisis hits, however, will reap a windfall. But who does that help, except the lucky retailers?

 

most such justifications of price gouging fail to take notice of the population that can’t pay the higher (gouged) prices under any circumstances

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Seems to me the logical response is to allow free market pricing (incentivising profit-seeking players to help solve the problem) and a huge not-for-profit/charity/state push to get supplies into the affected area as well.

 

Not quite but very close. THe logical response is to allow free market pricing and use the market prices to determine which supplies are most in demand. Then non-profit charities can use market prices to prioritize what supplies to obtain. THe prices aught to be viewed as pieces of information that we can use instead of morally. If the prices where published on websites they could be used by anyone who wanted to help to determine exactly what is needed in material terms. This was my original idea of how disasters should be handled...instead of central planning.

 

Another factor commonly overlooked by defenders of price gouging is that natural disasters tend to be (1) short-term and (2) not amenable to rapid response by market forces. If there’s no physical way to get a new supply of bottled water into some part of Houston, then allowing unrestrained price increases won’t produce a larger supply. Retailers lucky enough to have a few cases in the back room when the crisis hits, however, will reap a windfall. But who does that help, except the lucky retailers?

 

So here we have an area of big disagreement. My view is that markets are work well when it comes to sudden, large changes. They are fantastic at very rapid responses to sudden unexpected events or disruptions. Where they are much less necessary and where central planning really works well is when things change slowly.

 

So I would completely reverse this intuition. Use planning and regulation if you want during normal times but use markets when the unexpected happens.

 

lets invert the problem: why do suppliers continue to sell product at "below market" prices in emergency conditions, when price gouging laws would be in effect? If they were truly rational economic players and could sell water at $99/case, why would they ever stick around at great danger to themselves and sell at $2/case?

 

Because they are repeat sellers. Generally no stores raise prices. So if you are the one store that does you stick out like a sore thumb and customers will retaliate by not shopping with you after the disaster ends. Also its illegal. And most people hate price gougers for moral reasons. I think price gouging is the one thing where you get something in the order of 90% of Democrats and Republicans against it.

 

However this can change. You could educate people. The government could tell large chains: We expect and encourage you to raise prices to eliminate lineups and shortages. Tell us all prices that are high so we know what to prioritize for aid efforts. The could tell people: Look prices will rise if disaster hits and so you should have an emergency kit and this is what should be in it.

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So, this is about a compromise between maximizing welfare, respecting freedom, and promoting virtue.

 

In our democracies, there is a private space between what is lawful AND ethical/moral behavior.

 

This is a space where compromise may have to be made between the three pillars mentioned above.

 

My opinion is that this private space should be left alone as much as possible in order to preserve freedom. Virtue is subjective.

 

However… after reading this thread and thinking about it, I find now that a reasonable compromise could be reached.

 

My opinion: During natural disasters and catastrophes, large scale measures need to be applied across several sectors that are best coordinated at the government level in order to assist citizens and communities when market signals may not correspond to the actual demand/supply situation. In certain selected instances, price discovery may reflect a disproportionate reward to some at the expense of a disproportionate cost to others.

 

So,

 

I like petec’s idea of minimizing opportunities for price gouging (primary prevention) and think that specific criteria (which items, what price premiums) could be determined (secondary prevention) in order to efficiently put a cap on specific abuse scenarios.

 

Not everybody would be satisfied but I figure that we could get a reasonable majority multi-partisan agreement.

 

I really cherish freedom but am also amazed by civilization.

 

So comrade, live free or die?

 

 

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If you haven't loaded up a truck with water and generators to drive down to Texas yet, then the price isn't high enough yet for you.

 

Dramatically rising prices brings needed resources into the area.  The higher the prices the quicker the resources will get there and the farther out they will come from. (which will bring prices back down).

 

Also as someone above mentioned it stops hoarding.  If the first person to the store buys up all of the water then there is none left for anyone else at any price.  If the price is high enough people will only buy what they absolutely need.

 

There is no such thing as price gouging.  If the price is too high then no one will buy from you.  If someone agrees to pay your price then it wasn't too high.

 

 

 

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There is no such thing as price gouging.  If the price is too high then no one will buy from you.  If someone agrees to pay your price then it wasn't too high.

 

most such justifications of price gouging fail to take notice of the population that can’t pay the higher (gouged) prices under any circumstances.

 

Has anyone here actually lived through a hurricane? It seems like everyone is just spouting textbook economics. I'll give you an example. When Sandy hit, gas stations weren't gouging customers. But people places self-imposed limits on how much gas you could take (to prevent the hoarding you all mention). Fill your tank and move on. I remember waiting in a gas line, about 5 cars back from the pump. The guy at the pump pulled out a gas canister etc. Well, myself, about 2 other guys, and a police officer all made him aware of the "deal". Fill you take, move on. Everyone else has needs too and nobody knows when more supply can get through. Traditional economics textbooks fail to take account of these types of human development, because they make the assumption that people are economically rational machines.

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There is no such thing as price gouging.  If the price is too high then no one will buy from you.  If someone agrees to pay your price then it wasn't too high.

 

most such justifications of price gouging fail to take notice of the population that can’t pay the higher (gouged) prices under any circumstances.

 

Has anyone here actually lived through a hurricane? It seems like everyone is just spouting textbook economics. I'll give you an example. When Sandy hit, gas stations weren't gouging customers. But people places self-imposed limits on how much gas you could take (to prevent the hoarding you all mention). Fill your tank and move on. I remember waiting in a gas line, about 5 cars back from the pump. The guy at the pump pulled out a gas canister etc. Well, myself, about 2 other guys, and a police officer all made him aware of the "deal". Fill you take, move on. Everyone else has needs too and nobody knows when more supply can get through. Traditional economics textbooks fail to take account of these types of human development, because they make the assumption that people are economically rational machines.

 

That is a helpful policy voluntarily implemented by the station owner for sure, but how many people with 1/2 - 3/4 tanks filled up "just in case".  If the price was higher there may have been more gas for those that needed it the most.  Or certainly less of a line at the pump.

 

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