You can bet on this fact: that occasionally there will be natural disasters like floods, fires, and earthquakes. You can also bet on a follow-on fact: that in those places, prices of essential goods and services will go up. And finally you can bet your life on this: that popular accusations of price gouging by greedy corporations and windfall profits will motivate politicians and bureaucrats to impose price controls.
Of all the harm that a natural disaster brings in its wake, one of the most harmful and the most avoidable is the deliberate, the imposition of price controls. It’s entirely human-caused. There is no justification. The move to control prices is based on ignorance of reality, a desire to do good, to signal a virtuous concern for the plight of the poor. It is wrongheaded and outright evil in its consequences.
Every disaster brings out the usual suspects who recycle the economic arguments against price controls. It’s hard to keep coming up with new and innovative ways to explain basic concepts of economics. But they do try.
Here’s a bit from the NY Times almost a year ago. Dateline: Sept 11, 2017. Hurricane price gouging is despicable. It starts:
When a devastating hurricane like Irma or Harvey arrives, stories about price gouging inevitably spread quickly. Last week, a one-way coach flight from Miami to Phoenix jumped in price from $547.50 to $3,258.50, prompting immediate outrage. In Houston, a picture of a case of water being sold for $42.96 at Best Buy did the same. (Best Buy apologized and said it was a “big mistake” by a few employees.)
Over all, more than 8,000 complaints of price gouging on items like gas, food and ice were lodged with the Florida attorney general’s office through the weekend.
On its face, the very idea of price gouging, especially during a natural disaster, feels outrageous. Indeed, 34 states have anti-gouging laws meant to protect consumers.
However, in a small slice of the world of economists and businesses, there is a fascinating debate about the topic — with many arguing that price gouging is actually a good thing.
Why is it a good thing that the price of the flight mentioned above rose six times the pre-disaster price? Why did the case of water cost a fortune? Is it simple greed or is there a reason?
Plain decency and intuition says making profiting from misery is morally wrong. But actually it’s the outrage against those high prices that is wrong and damaging. Our intuition is very, very wrong. It’s naive and divorced from reality.
To understand we have to understand what a market is and what its essential function is. Markets, through the price mechanism, convey information to buyers and sellers. That information is essential to know what to do.
The price signals to sellers how much stuff they have to bring to the market, and to buyers whether or not they need to economize. When potential sellers recognize an opportunity to make a profit and they enter the market. That increases the amount available and consequently moderates the price. The buyers see the higher than normal prices and tighten their belts. That reduces the quantities they consume.
Price controls destroy the information channels that people depend on to tell them what to do. They tell sellers that they will be foolish to supply their products at the controlled price. And they tell consumers that they don’t need to modify their consumption decisions. That leads to shortages of goods in the market.
Then there is the matter of fixed supplies. At any moment, at any place, there is only a fixed amount available for consumption. The supply is said to be “inelastic” — you cannot expand the supply however much you wish you could.
The number of airline seats is fixed in the short run (by definition.) If today 200 people want to travel from A to B but the airlines have only 100 seats to sell, everyone cannot be accommodated. No one has empty planes sitting around to meet unexpected demand. We have to “ration” out the available 100 seats,. It can be done in a variety of ways. One, a lottery system. Two, people in positions of authority choose who gets to travel. Three, let the market ration the seats by allowing the price to rise to the level at which there will be only 100 people willing to pay for the seats.
Yeah but that means the seats will be taken by the rich and the powerful. Yes, that’s the reality. There is no way that the number of seats can be expanded to meet the demand. The seats will go to those who are willing to pay the higher price, or to those who have special political privileges. You can address the problem through the market (voluntary transactions) or through political means (which means coercion and force.)
Price controls basically means that sellers are discouraged from entering the market. Take the airline example. Airlines don’t cover their costs in every flight. On average their try to cover their costs. They lose money during the lean seasons because they cannot fill all the seats that they need to have for the peak seasons. During the peak seasons, they fill the seats and at a higher price for each seat. That gives them the headroom to be able to stay in business by riding out the lean season losses.
If the airlines were not allowed to raise their prices during the peak seasons, they would have to fly fewer seats round the year so that they fill all seats during the lean and peak periods. Fewer seats means fewer seats for people. The fact that the prices are stable throughout the year is no good thing. Prices should fluctuate to approach some optimal outcome.
Why shouldn’t the government regulate prices? Simple reason: the government officials don’t have a clue about costs and prices. If they had they would be running businesses. Furthermore, they don’t have an incentive to remedy their cluelessness. They don’t have any skin in the game. The airlines people lose money if they are clueless and the market weeds out the ignorant and the incompetent. People in business have something to lose.
Government officials face perverse incentives. Not only they don’t pay a price for their misguided policies that are supposedly for the poor, they are rewarded for proposing idiotic policies by the people who are actually hurt by those same policies. It’s a perfect storm of idiocy and ignorance.
I wish we the people get into the habit of pausing every now and then, especially when we feel an outrage coming on, and ponder two simple questions:
- If we believe this particular fact about the world to be true, what other facts must be true about the world?
- If we do what’s being proposed, what else would happen other than what we are attempting to accomplish?
So if we believe that price controls are good for the poor, what other fact have to be true about the world? Do we see those things in the world? If not, perhaps we are mistaken about the goodness of price controls.
And if we do impose price controls, what are the consequences that must follow, other than preventing the price increase? Lazily assuming that nothing else changes is being full retard. Never go full retard.
It’s all karma, neh?