Thursday, September 08, 2005

Price gouging again

Dave Hoffman argues:
In civil emergencies, markets don't work to clear information in rational ways. Even high prices will not serve to reduce demand for, say, water and gasoline, over the short term if folks think their lives are going to depend on having such commodities nearby. Price gouging regulations do two things to reduce panic and regulate demand. First, they increase trust in market transactions (an SEC-like role) and thus will act to reduce "panic demand" in emergencies without increasing price. Second, the regulations - when publicized appropriately - have the same information forcing effect as higher prices themselves, teaching people that there are supply interruptions and they should change their use patterns until conditions improve. In both ways, price gouging regulations use norms and soft-economics to accomplish market stabilization in a more satisfactory way than the market would, if left to its own devices.
David concurs.

The problem here is that there is a conflation between things that build what Talcott Parsons, following Halevy, I think, calls "natural identity of interests" in the market economy, and what you need to resolve the immediate crisis. I agree that building trust in markets and etc. is a good thing. If people trust in market norms and believe that market outcomes are just and fair, then you can have a functioning economy (and society). But if you are really in a situation of genuine shortage, then telling someone that they should reduce usage doesn't mean they will. You actually have to do something to make them reduce their usage. And the most guaranteed way is to change prices (or this may cause them to totally disregard norms and resort to theft). If theft doesn't occur, then you can tell the following story (posted in comments at the Debate Link and Prawfs Blawg):
You are confronted with a problem: given a fixed and (insufficient) amount of a commodity, how am I to distribute it? Letting prices rise will prevent some people from getting supplies of that good (and it will be poor people who are screwed), but then they will be forced to look for close substitutes or alternative means to the same end. This effectively increases the amount of gas and water available. If you simply fix prices, people devote their energy to being first in line, but this doesn't actually change anything about the fact that you have a shortage. So the shortage will remain. On net, then, you have less of the good if you fix prices than if you let prices float.

You have a dramatic shortage and you want people's creative energy devoted to finding alternative sources rather than getting in line first.
This argument is unsatisfactory in that it relies on "human ingenuity," which is the weapon of last resort for an economist: if nothing else, markets are better than alternatives because they align incentives to harness "human ingenuity," whatever that is. But even though its unsatisfactory, that line of argument has a plausibility that pulling out lines about "telling people to want different things" doesn't have, especially when you have already stipulated that having these commodities is perceived to be a matter of life and death.


Blogger ME Strauss said...

Interesting argument,Isaac.

You're right in that you can't have it both ways. They can't be commodities and a matter of life and death.


1:44 AM  

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