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More on Price Gouging

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Radio host Jay Diamond [2], about whom I recently wrote [3], e-mailed me recently in response to my post. I share here some of Jay’s comments (with his kind permission).

Among the items in my post that Jay (amiably) objects to is my emphasis on his on-air example of the cash-rich drug dealer bidding for scant supplies of milk and other foodstuffs against the very poor parents of starving children:

“To me, this is a very reductive synopsis of the various ways I tried to illustrate why some approach to rationing other than by price is preferable for individuals and society as a whole.

”For example, I believe I specifically made certain to make clear that in the case of Charley or any disaster, it is not only “the poor” that are the issue.

”I say this because in such an instance it is, in fact, not so much the inability of “the poor” to pay the price but rather the special and specific ability of the wealthiest person in that set of people, who invariably will dominate not only the poor, but also the middle class and the less rich.

”The truth is that in such an instance of temporary scarcity the one richest person or entity in the set of people can bid up the price of any necessity they wish; even if only on a whim.

”So it is not just “the poor” who are susceptible to this notion of “freedom”. It is a freedom that is conferred on the wealthiest person even at the expense of other well heeled individuals.”

I dispute Jay’s argument.

First, as an empirical matter, the wealthiest person in any group of people do not “invariably [] dominate not only the poor, but also the middle class and the less rich.” If Jay’s claim were correct, we’d witness Bill Gates “dominating” all of Seattle, presumably even to the detriment of billionaires Steve Ballmer and Paul Allen. Of course, we witness no such thing.

I suspect Jay would respond by arguing – plausibly – that he means his statement to apply only to unusually harsh economic times, such as those in the immediate aftermath of a natural disaster like Hurricane Charley, and that I misunderstand what he means by “dominate.”

I would plead guilty to the last charge. It’s a vague term.

If by “dominate” he means that under a system of rationing by prices a wealthy person can better afford to buy some good or service than can a less wealthy person, then I agree. But such “domination” emphatically does not mean that less wealthy people invariably get nothing or get only too little or even less. Bill Gates does not buy up all of the food at Seattle-area supermarkets. I doubt even that Bill Gates buys more bananas or breakfast cereal for each person in his family than I buy for each person in my family.

If Seattle suffered a severe natural disaster and there were no regulations against so-called “price gouging, would Gates suffer less than middle-class and poor Seattletonians? I’m sure he would. And it is indeed possible [4] (note the word!) that some very poor Seattletonians would starve to death because of their inability to pay, say, $50 for a gallon of milk and $100 for a loaf of bread. Furthermore, it is also possible that effective regulations against price gouging would enable these very poor people, who would otherwise starve to death, to be saved from death without at the same time causing anyone else to starve to death.

But ask yourself: what’s the likelihood that Bill Gates would be made worse off, in the immediate aftermath of a natural disaster, if regulations against price gouging were in effect and enforced? I suspect that Gates would still be able to acquire all the goods and services that he wants – almost as many as he’d acquire if market prices were the only rationing device.

First of all, it’s fantastical to imagine that black-markets will not arise – that Gates will not successfully bribe suppliers to give his children milk and bread if foodstuffs are so scarce that his children might otherwise starve to death. Secondly, suppliers unable to raise their prices nevertheless will have good reason (and ability) to curry the favor of wealthy people by ensuring that suddenly-scarcer goods and services are directed to the wealthy in return for what are hoped to be future favors.

The bottom line is that I can’t seriously imagine Bill Gates suffering very much after a natural disaster, whether or not “price gouging” is permitted. The same is true for all people of even moderately greater than normal wealth.

In brief, the wealthier someone is, the less likely he is to care much one way or the other about prohibitions against price gouging. (Indeed, I can make a strong case that wealthier people have a special incentive selfishly to endorse restrictions against price gouging: Bill Gates might well be even wealthier than Joe Sixpack in influence and connections than he is in money terms. If so, restrictions against price gouging will increase Gates’s advantage over Mr. Sixpack at acquiring suddenly-scarcer goods and services. Mr. Sixpack might have only a few dollars to spend, but he might have absolutely no special connections to cash in on.)

What’s needed most urgently in the aftermath of a natural disaster is a quick infusion of replacement goods and services. Keeping post-disaster prices artificially low will slow this infusion, making the people who are least-wealthy in terms of connections and ability to bribe much worse off.

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