Russ Roberts

Munger on Price Gouging

EconTalk Episode with Mike Munger
Hosted by Russ Roberts
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Michael MungerMike Munger of Duke University recounts the harrowing (and fascinating) experience of being in the path of a hurricane and the economic forces that were set in motion as a result. One of the most important is the import of urgent supplies when thousands of people are without electricity. Should prices be allowed to rise freely or should the government restrict prices? Listen in as Munger and EconTalk host Russ Roberts discuss the human side of economics after a catastrophe.

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Readings and Links related to this podcast

Podcast Readings
HIDE READINGS
  • "They Clapped: Can Price-Gouging Laws Prohibit Scarcity?" by Mike Munger
  • "Gouge Away: Hurricanes and the politics of prices" by John Hood. Reason Magazine Online, Dec. 1996
  • "North Carolina's Price Control Laws" by Roy Cordato. John Locke Foundation, 2006.
  • Price Controls by Hugh Rockoff. Concise Encyclopedia of Economics.
  • "Boettke on Katrina and the Economics of Disaster" Related podcast with Pete Boettke.
  • Highlights

    Time
    Podcast Highlights
    HIDE HIGHLIGHTS
    0:46Hurricane Fran, 1996, Raleigh, NC, far inland. Trees, chain saws, chaos. Why doesn't somebody do something? Markets? Gov't.?
    4:30When electricity is out, people need ice to preserve food and medicine. Coolers, closed freezers help, but only for a while without more ice. But ice was unavailable or frightfully costly!
    8:49How did Raleigh's anti-gouging law, previously passed in anticipation of such an emergency, work out? What did the law actually say? What were the fines for violations of actions like charging for ice what it cost to bring it in? Analagy to Marx Brothers' film, Coconuts: "Do you know what causes wage slaves? Wages!"
    13:47Mathematicians vs. economists. Paradox: "The only way to guarantee low prices is to allow sellers to charge high prices." Government facilitating vs. retarding free flow of goods like ice. Four young entrepreneurs from Goldsboro, NC, saved the community, but risked breaking confusing laws, by bringing in ice. Yeeha! Yahoos clear the path with chain saws, sell ice at $12/bag, help hundreds who wait on line, but annoy others.
    23:39Allocation by choice and market. What if it were you in line and you'd reached the front only to discover the price really put you at the edge of your decision? Buy the ice or step out of line? Some left; but for others the choice was at the margin: "That's outrageous! That's too much! Give me four bags." How did the entrepreneurs even choose the price?
    27:22Someone called the police, but who? Police closed down the ice entrepreneurs, impounded the trucks, turned off the trucks (thus melting the ice). Yet some people standing in line actually clapped when the police closed the line down. Why?
    35:26Small towns vs. big cities. The film "It's a Wonderful Life" depicts a run on the bank. Mary helps George (Jimmy Stewart), and as private citizens they rescue the local bank, a business they don't even own. But it worked out in a small town because of self-rationing when everyone knew each other. Who needs it the most? How do we ration scarce goods?
    44:00What works best when there is not enough to go around in a crisis? Number of bags of ice coming in differs depending on price system. Low price is guaranteed best by allowing high prices. But people still seem to favor anti-gouging laws and disallowing high prices even during crises. "Does the seller care?", is possibly the interesting question. Market prices are not always charged in every situation, but what are those situations? Maybe when the sellers and buyers know each other and can allocate otherwise. But what about when they don't know each other? See also Hayek.
    53:01Burger King in New Orleans after Hurricane Katrina gave a $5000 premium to incoming helpers as a housing allowance. The workers weren't arrested for accepting it! Why arrest individuals for accomplishing the same thing--providing necessary services--quicker and faster in the interim before corporations or the government can act? Vaccines, help to the elderly, critical services, and more are often supplied privately in emergencies, and more is often available. Anti-gouging laws do more to hurt than help in these emergencies.

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    COMMENTS (11 to date)
    Nathan Adams writes:

    Steven Pinker talks about the differences in how much we will do for family, friends/neighbors, and strangers; respectively, toward the end of his book How The Mind Works.

    Here's how it breaks down:

    1) We will make significant sacrifices for our family members (our children more so, our third cousin twice-removed less so) because doing so will tend to propagate our genes.

    2) We will help our friends and neighbors because we are part of an ongoing tit-for-tat relationship with them -- we can expect them to return the favor of ice we give them after Hurricane Fran by, for instance, helping to shovel our driveway when the freak snowstorm happens a few months later. However, where we will actually make sacrifices for our kin, we will tend to help our neighbors only when we have goods or services beyond our immediate needs.

    3) We have little incentive to help total strangers. They don't share many of our genes and we have no basis to assume they will return the favor. It is in the relationships between strangers where a free market is critical for assuring cooperation.

    Pinker makes the case that these tendencies are strongly hardwired into our brains. After reading Pinker, I've come to the conclusion that these tendencies are essentially why free markets are superior to socialism in generating wealth in large societies.

    Great podcast series!

    Mike Edwards writes:

    Great to hear someone discussing economics, that social science that just doesn't make sense:), I just worried that some counterpoints to your arguments may not get considered.
    It was mentioned that competition would lower prices soon after the hurricane but I think it was forgotten that there are massive barriers to entry in this situation so while the supply would be higher it still would be grossly inadequate to lower prices to any significant amount.
    The market is an inefficient way of regulating supply in an emergency, in fact this is the very reason that we have government. The governments role is to provide those public goods and services that we are unable to provide to ourselves, they make roads, provide law enforcement and take care of us in case of emergencies. More emphasis should be placed on the governments lack of action in this case because the mechanism for change in the government is much slower and harder to effect than is that of a free market. People need longer memories and it is the role of academics and other experts to remind people of what they should be remembering.
    It was also mentioned that peoples goodwill towards each other would help to smooth out the inequities of the market system in emergencies, but just like the vaccine example from the end of the podcast people are always going to maximize their expected utility. For instance consider that my neighbor has diabetes and he needs ice, why should it be me that gives up my ice? I would have to have an total expected utility that is higher in order to give up my bag of ice, e.g. I feel so guilty about his insulin rotting that I would get a negative value from my enjoyment of the ice. The evidence that this does not happen is the existence of price gouging laws, sometimes we learn from past mistakes. Without these laws we wouldn't be able to hold one store accountable because all sellers would sell at the market, so unless there was enough ill will created to encourage new players to come to the market there is no incentive for stores to not price gouge.
    Also it was asked why the laborer that takes the offered wage is not punished? Two parts to this one, firstly the service of cooking burgers is not essential. The goods that the Burger King provides are considered to be essential, but the labor to make them is not. The second part comes from the fact that this isn't enough of a problem to warrant legislation.
    These laws are in place because majority of the population is unable to fend for itself in these situations because they lack the resources to absorb these onetime events. There are just more have nots than there are haves. This is why we use REGULATED markets even for day to day life. It should be explored that government is to blame for the shortages and not the legislation in question

    Sorry for the long ramble, look forward to your future Podcasts.

    Mike Munger writes:

    Mike E, we may disagree about that.

    Or, perhaps not.

    I think the legislation is to blame for the fact that there are shortages in situations where markets could augment supply if we would let them work.

    But you are surely correct, Mike, in situations where the supply is effectively fixed, and the shortage requires some other rationing device.

    Where we may disagree is about just how often this latter case occurs. I think it is very rare, because left to their own devices people are extremely creative about finding ways to take goods to the needy, IF they can make money doing it.

    I guess I would ask this: why would expect government to be able to solve the problem? Why would government be able to supply ice and other goods?

    Second, if you are RIGHT, we don't need price-gouging prohibitions, because the flood of government provided supplies will drive the price down, and price-gouging won't even be possible. That is what happened in Raleigh after about 6 or 7 days: You could get ice essentially for free. But 6 or 7 days is a long time.

    Your answer appears to be, "Make government do a better job." And I don't disagree. But "Eliminate price-gouging laws" is not mutually exclusive. Prices are the canary in the coal mine. If prices are HIGH, government is not doing a good enough job in bringing in relief supplies, by definition. Eliminating price-gouging laws gives us a back-up mechanism for organizing relief supplies.

    True, the market won't take care of the desperately poor. But they aren't being served by government either, as the example of Katrina shows.

    Russ Roberts writes:

    Mike (and Mike E.)

    You say that the market won't take care of the desperately poor. That is true in the narrowest of senses—people with few resources can't acquire much in the marketplace. But the important distinction is between centralized, coercive, top-down solutions to human suffering (government) and decentralized, voluntary, emergent, bottom-up solutions--what Pete Boettke in the previous podcast called "civil society," that would include organized charity, informal chairty of friends, families and strangers and even Home Depot and other businesses that acting without centralized instruction, worked to mitigate the effects of Katrina.

    Josh Kalish writes:

    I think if anything has been proven from past history is that the private market is a lot better than the government and handling most if not all emergency situations.

    One point that you all didn't bring up is the moral hazard of the government "promise" of emergency help. A lot of supply is taken off the market b/c people expect that the government will be out there offering it for free. For example, probably some people who might have though of bringing in ice - or something else - to sell thought that the government would be there first giving it away (albeit at a tax cost that might well exceed the $12 a bag above).

    Mike Munger writes:

    Josh K makes a good point. Government promises, not just threats, can crowd out private charity.

    Pascal Bernhard writes:

    Sir,

    I don't know, if there is any anti-gouging law in place in France, but you can surely count on activist government to take "appropriate" action in case "price-gouging" is deemed to occur. Quite absurdly though, there is a law against low prices provided by the market. This legislation prohibits stores to sell their goods below cost under any circumstance (which might make quite some business sense in order to free shelf space for example), so that there is no "unfair" competition against other stores. Could this be called an "anti-bargain" law?

    Mike Munger writes:

    Mr. Bernhard, you raise a wonderful point!

    These laws are usually justified by a desire to assure that markets are orderly, and that (as you say) unfair competition can be prevented.

    The difference is that I understand the benefits of these laws, or at least their appeal. It is akin to the "monopolistic competition" you get from slight product differentiation in (for example) restaurants.

    In the case of French stores, this would mean that (a) prices are too high, (b) poor people pay more than their fair share, but (c) there are more stores than there would be without the law. This increases (d) convenience for rich people, more stores, don't have to stand in line with dirty poor people. THe strange thing is (e) the stores don't actually benefit from the higher prices. Prevented from competing on price, they compete by having increased entry and convenience. The only people who benefit from this law are the rich people who support it out of "concern" for the poor!

    In the U.S., this idiocy mostly takes the form of criticizing WalMart. The rich progressives who hate WalMart would never shop there; too many smelly poor people. But if you go to WalMart in mid-December, it is full of poor people trying to buy presents for their children.

    Would a law that kept WalMart from charging low prices hurt rich progressives? Nope. But it would sure hurt poor people.

    The U.S. is in the process of passing a minimum wage law. Many countries have laws that prohibit "

    Thanks for reading, Mr. Bernhard, and we'll look for you on this site in the future!

    Wojtek Grabski writes:

    As I was listening to your most recent discussion on price gouging I was attempting to formulate the best possible way to explain these phenomena to my ... fairly "socially-responsible" relatives. As I was doing this I happened upon a most important point:

    You prefer to treat the effect of shortages as throwing an additional number of infinite price-points into the mean. But it is more helpful to think of it this way: Suppose that you believe that retailers engaging in gouging has the undesirable effect that the poor are less able to purchase a commodity, and are more restricted by its price, than are the wealthy. Most in my country, Canada, would say that this is an unfair discriminatory effect and that the wealthy should not be allowed to exercise this advantage in an emergency. However, even if anti-gouging laws were in effect, someone who possessed a small fortune could still call, or somehow hire, a helicopter to either ferry them out, or bring in ice (or a generator) at a much higher price than any gouging would have created, effectively raising the lowest price not to infinity, but to a point where most but not all cannot afford it -- creating an even larger discriminatory effect! The only way around this would be to prohibit the purchase of ice at an elevated price, which is about as ridiculous a suggestion as one can make. And then the more important point comes into effect, namely that anti-gouging laws not only raise the lowest price but also prevent it from going down until the situation changes.

    Thanks for your talks.. they serve the role of case-studies in my self-education of economic principles.

    Russ Roberts writes:

    Wojtek,

    In the podcast, I mentioned that the people who get in line to buy scarce supplies are the people willing to pay the most and that those people are not necessarily the richest people. I learned this lesson when a student of mine explained that her husband—a successful contractor—had decided not to buy a generator after a hurricane here in the DC area because it was too expensive. It turned out he already had a couple and the purchase was just for extra insurance. So someone else got that generator who was willing to pay that high price but who wasn't rich enough to keep an extra or two on hand. Your point really drives it home—richer people often have the ability to cope with a disaster either because they can make something happen (your examples) or because they already have done something to prepare. When the power goes out, they're more likely to be able to have ice because they're more likely to have some system of backup electricity. Keeping prices down in the name of fairness discourages extra supplies coming in and can actually increase the inequality of the ice distribution. And once it becomes known that in the future there will be price controls on crucial supplies, richer people will take steps to prepare that poor people cannot afford to take.

    Arnold Kriegbaum writes:

    The market is almost always the best way for reality to be our teacher. Let's say I live in Raleigh. Let's also say that I never prepare for a hurricane because I want to spend my money now on concert tickets or organic produce. I get the benefit of a better life now.

    Now, a hurricane hits. My life is disrupted since I was really betting against just such a disturbance to the ongoing cost structures.

    Apart from the absolute scarcity resulting from price controls in the days after the tragedy, aren't hard times in life (as in $12 ice) moments in which people should stop and reevaluate the sustainability of their current life patterns?

    What better way for me to be a little more prepared for the next tragedy than to actually have to face my own unpreparedness in this one.

    Though not a price gouging issue, the orange pickers in this area are currently reaping much immediate help: free food and clothing, cash payments probably to follow from private and public sources. While difficulties in life are never easy, they are there to encourage a redirection, a more strategically correct plan of attack for life.

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