OnPoint by Keith Ng


On Price Gouging

The people supporting price gouging in Christchurch are not evil. They come from the same starting point that I do: We have more demand than we have supply – how do we decide who gets it and who misses out?

The overriding goal is to get resources to those who need it the most. If someone along the line makes a profit from it, that's beside the point. Fairness and equity doesn't fill up your petrol tank.

Without price gouging, we still ration, but on a crude first-come-first-served basis. This does nothing to direct resources to those who need it the most. It comes down to chance and your ability to wait. It's a wasteful, punishing system – people lose hours waiting in line, when they could be doing something useful, which is a very real cost to everyone.

But even though the status quo is bad, it doesn't mean that price rationing is better.

On petrol price gouging

Eric Crampton, a economics lecturer at Canterbury, argues specifically for price gouging on petrol. Even though there is enough petrol for everyone who needs it, because of uncertainty over supply, people are stocking up on petrol just in case. This creates a vicious cycle because those people who are hoarding petrol create an actual petrol shortage, which scares other people into hoarding petrol.

Crampton argues that doubling prices, just for a few days, will induce “intertemporal substitution” (that's Economistspeak for “waiting”) among hoarders, while those with genuine need will shell out the extra cash.

The dodgy part of his logic is the assumption that hoarding is a weak (i.e. elastic) demand. Hoarding is entirely different from normal consumption. It's born out of uncertainty over future supply (“Will the tankers arrive soon?”) and need (“Will I need to drive out of town in a hurry?”).

With a product like petrol, people are not just buying transportation, they are buying security. Many people are willing to pay a huge premium to buy that security, so it's difficult to raise prices enough to stop them. And if you did raise prices that high, you're guaranteed to hurt many people with genuine, immediate need, or make it unaffordable for them altogether.

Moreover, the root of the problem is that people feel insecure. A sudden, massive spike in price will make this worse. This is why price gouging is not a solution to petrol hoarding.

On general price gouging

With other goods, such as groceries, the perverse effects of uncertainty and insecurity don't come into play as much, so the economic arguments for price gouging is much stronger. And as I said earlier, fairness and equity doesn't fill up your petrol tank or buy you milk.

However, it does scare off looters, check on your grandmother and drive you to the hospital. (It might also buy you milk.)

The most remarked upon fact after the earthquake is the way in which people have been helping each other. Many people have acted in complete defiance of economic self-interest, and as a result, housing, labour, transport, equipment, all kinds of goods have been given to people who most need it.

Somebody can probably wrangle an explanation out of this that's consistent with classical economics. Perhaps helping the community is in their own long-term self-interest, and perhaps helping others means that they get helped in return.

But the bottom line is that a whole lot of people told the rational economic agent to take a hike*, and as a result, they did a much better job of efficiently allocating resources (that's Economistspeak for “helping people and getting shit done”) than the market ever could.

I will fisticuffs anyone who reckons that this – people helping each other because they goddamn wanted to – was not an efficient outcome.

Price gouging may, in fact, be a good way of allocating milk or beans. It may prevent empty shelves or long queues. But the price of this is that people will despise their corner dairies and resent their rich neighbours, who will in turn be suspicious of them.

Fairness and equity – encapuslated in “we're all in this together” – is nothing less than the core of community. If you fuck with this, you're fucking with the core that's holding a community in crisis together, with people's goodwill towards each other, with a spirit that's allowing it to do things it could never do under normal circumstances.

The efficient allocation of milk and beans is utterly inconsequential in comparison. So yeah, don't price gouge.

(UPDATE: I haven't quite made up my mind about builders gouging though. The "extraordinary goodwill" argument is weaker, since things will be back to normal (well, the new normal) in the timeframe in which they'll be working; the allocative efficiency arguments are stronger, since prices really would encourage builders to move to Christchurch in a useful timeframe.)

* What I really meant to say here was that "Homo economicus can go fuck the Austrian School in the fucking ear". But that probably wasn't what most Canterburians were thinking.

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