Monday, August 15, 2005

Something has always bothered me...

...about a type of economic argument often used in libertarian circles that goes something like this:
price increases in the wake of natural disasters merely reflect the now-reduced supplies and now-higher demands ... because these price increases reveal correct information about the now-more-unfortunate state of the world, these price increases are beneficial.
And this:
Suppose that a natural disaster hits. It causes demand for staple goods ... to rise appreciably ... Suppose that all merchants who regularly sell staple goods ... refuse to raise their prices above pre-disaster levels. ... what logic – what scale – does each magnanimous merchant use to rank [the people's] different needs?
Let me just say that I basically agree with the argument. In a disaster, or any situation, an efficient allocation of goods is achieved through the price system, which means "gouging" in many cases. Government price controls don't help in such a situation, they only make a bad situation worse by creating shortages, etc.

So what bothers me about the argument? Two things. The first is saying that "these price increases are beneficial." But this certainly needs to be qualified. Price increases are bad, they reduce everyone's real income. As long as your nominal income is the same and the price of anything is going up, you are worse off. To Don Boudreaux's credit, he is better at pointing this out than most libertarians. A more exact statement is that "these price increases allow society to maximize welfare, even though they are bad for consumers." The point is that, while price increases are better for society as a whole than no price increases, they are still bad.

The other thing that bothers me is saying that the result of the price system is *the* best way to satisfy everyone's *needs*. This language is also not nearly careful enough. The result of the price system is highly sensitive to income. It is hard to say that since John makes $100,000 and Jane makes $30,000 that John *needs* more emergency bottled water than does Jane. Who is to know who *needs* more? How would we even construct a rubric to decide? It would be correct to say that John *demands* more water than Jane, noting that demand is partially determined by income. Furthermore, while the price system results in *a* best way to satisfy such demands, it is incorrect to say that it is *the* best way. Depending on how wealth is distributed throughout a society there can be many best ways, some more equitable than others.

Price controls won't get us to those other "bests" but lump-sum transfers will and they are particularly easy to execute in disasters. Just give everyone under a certain income level in a disaster zone a check for some uniform amount. Then let stores gouge away.

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