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Prices: The Great Equalizer

Last night I was a guest on Jay Diamond’s radio talk show on WRKO in Boston. The issue was price gouging.

Mr. Diamond supports regulations that prevent so-called “price gouging.” The hypothetical possibility he raised again and again was a shortage of food following a natural disaster, with the unregulated high prices making it impossible for a poor family to feed its starving children, while a rich drug dealer gets all the food he wants.

My response to this hypothetical was only mediocre. I pointed out that the relevant question is “as compared to what?” While I’m confident that this response is a sound start, I didn’t carry my point to as compelling a conclusion as I would have liked.

Here’s what I would like to have said, had I the eloquence and the time; my concluding line would have been “market prices are the great equalizer.”

I would have reached this conclusion by pointing out that any alternative to freely adjusting prices involves some non-price method of rationing. Any practical, realistic method apart from rationing by price hikes will involve arbitrariness at least as great (I think greater) than whatever arbitrariness there is in income distribution.

One alternative method of rationing is queuing. But surely first-come, first-served is quite arbitrary. Perhaps the father with starving children will get to the front of the line, but who’s to say that the drug dealer won’t beat him to the front of the queue? Indeed, the father with starving children likely has lots of important tasks to carry out at home in the immediate aftermath of a natural disaster. These tasks might well keep him at home too long to get a favorable spot in the queue, or, if he does get a favorable spot, he’ll waste lots of time queuing rather than being at home with his family during an especially dire time of need.

An even more likely alternative to rationing by price is rationing by personal connections – family ties or political ties. The poor family with starving children is unlikely to have as many personal and political connections as are wealthier people in town. The outcome of rationing by connections will almost certainly be biased in favor of wealthier, more-prominent citizens.

One great advantage of rationing by market prices is that they reduce to a minimum the role of arbitrariness. Price are, in other words, a great equalizer. Anyone who is willing to pay the market price for a good or service is just as likely to get that good or service as is the seller’s mother, neighbor, or bowling buddy.