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Thaler’s Argument Fails

Friday’s Marketplace report on so-called “price gouging” was very good, featuring as it did Matt Zwolinski and GMU Econ alum Mike Giberson.  The economist interviewed in support of government prohibition of “price gouging” was the University of Chicago’s Richard Thaler.  Here’s a letter that I sent to Marketplace:

Thanks for an informative report during your September 1st program on so-called “price gouging.”  It seems, however, that the chief reason Professor Richard Thaler offered in opposition to “price gouging” in fact only further justifies the practice.

Prof. Thaler argued that firms that raise prices during emergencies anger consumers and, as a result, reduce consumers’ likelihood of doing business with these firms in the future.  This argument is undoubtedly correct.  Yet surely no one is more aware of this downside of “price gouging” – and more interested in avoiding it – than are merchants themselves.  Therefore, if after a natural disaster we nevertheless witness significant price hikes, we must ask why the price-hiking merchants are knowingly risking their reputations with consumers.  The obvious answer is that the natural disaster caused supplies of goods to fall so extremely that it pays merchants to raise prices even though doing so imperils these merchants’ good reputations.

The fact that merchants willingly endanger their reputations in such situations by raising prices means that consumers’ desperation to acquire bottled water, propane, and other staple goods is extreme.  And although the conclusion runs counter to most people’s moral instincts, the ability of high prices to incite suppliers to exert the extra effort that is necessary to rush additional supplies of goods to market is never more needed and vital – and justified – than when consumers are so very desperate to acquire additional supplies that the prices these consumers are willing to pay are so high that merchants will charge these high prices despite the resulting risks to their reputations.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

Thaler’s closing argument against “price gouging” – ““During a time of crisis, it’s a time for all of us to pitch in, it’s not a time for us to grab” – is not only unrelated to his main point in the Marketplace report, it ignores the fact that government restrictions on “price gouging” actually discourage pitching-in and sharing.

UPDATE: Here’s more from David Henderson.