After creating a new “Economics” post category yesterday, this is my second post on the subject in as many days. In any case, I was reading up on Hurricane Katrina and her aftermath, and I came across this article on price gouging, which I like from a theoretical standpoint. While I largely agree with Mr. Brown’s arguments, I do believe that they are oversimplified — “ceteris paribus” does not apply.
In essence, Brown asserts that price gouging is not unethical because it stems naturally from supply and demand. He uses ice as an example:
But suppose the store owner is operating in an unhampered market. Realizing that many more people than usual will now demand ice, and also realizing that with supply lines temporarily severed it will be difficult or impossible to bring in new supplies of ice for at least several days, he resorts to the expedient of raising the price to, say, $15.39 a bag.
Now customers will act more economically with respect to the available supply. Now, the person who has $60 in his wallet, and who had been willing to pay $17 to buy four bags of ice, may be willing to pay for only one or two bags of ice (because he needs the balance of his ready cash for other immediate needs). Some of the persons seeking ice may decide that they have a large enough reserve of canned food in their homes that they don’t need to worry about preserving the one pound of ground beef in their freezer. They may forgo the purchase of ice altogether, even if they can “afford” it in the sense that they have twenty-dollar bills in their wallets. Meanwhile, the stragglers who in the first scenario lacked any opportunity to purchase ice will now be able to.
Mr. Brown goes on to argue that rationing is not an effective method of controlling distribution for the simple reason that some people may legitimately need more ice, and be willing to pay whatever it takes to get the ice they need. But this argument depends on all other things being equal, and Mr. Brown is making a dangerous assumption: that everyone is on equal economic footing, which is obviously not the case in the real world.
In New Orleans, 28% of the population is below the poverty line. This means that people who legitimately may need a large amount of ice simply won’t be able to afford it, because in absolute terms, they literally don’t have the money to purchase it. (Obviously using ice in the case of the situation in NoLa is superfluous since they can’t even get drinking water.)
Mr. Brown’s theory is nice, but it doesn’t work everywhere, which leaves us back where we started: how do you control distribution of goods in a severely depressed market without resorting to ineffective price controls and rationing? As implied earlier, price controls don’t work because suppressing the price of goods can create an artificial demand and lead to things like hoarding, which creates further shortages. (The NYC rent controls are another example of artificially controlling prices creates more problems then it solves.)
While I like to think I poked a hole or two in Mr. Brown’s thesis, I don’t have a suitable universal solution to offer in its place — probably because there isn’t one. I guess it’s simply a matter of choosing the lesser of two evils, but even that seems like a difficult proposition.