Tuesday, September 13, 2005

John Stossel: Price Gouging

The type of price gouging Stossel seems to be defending is like that of a person on a yaught finding a shipwreck victim floating in the ocean, and charging him $100,000 to come on board.

A few days ago, a friend pointed me to a syndicated column written by John Stossel in which he defended price gouging, and asked for my opinion.

Strossel asks us to consider a scenario where an individual with a dehydrated baby is looking for water. The individual first goes to somebody who was selling water at the standard price. However, because of the huge demand, this seller has run out of water.

The parent then finds another person who is selling water for $20 per bottle. Because he sold the water for such a high price, he still had water in stock, and the parent (in his scenario) was able to save the dehydrated baby.

His point was that price gougers save lives.

In Defense of "Price Gouging"

I understand Stossel's main point about price gouging. I have written an article defending "price gouging" myself and the ways in which interfering with this practice does more harm than good.

However, my analysis differs from Stossel's in one crucial respect. Stossel neglected to consider an essential point.

The parent can only get the water if he has $20.

Stossel said, "By charging $20, the price gouger makes sure his water goes to those who really need it." However, this is not true. The price gouger will freely sell a bottle of water for $20 to the person who wants to give his dog a shampoo. At the same time, the parent who has a dehydrated child, but who does not have $20, gets nothing.

This is not a case of resource going to those "who can really need it." The resource goes to those who can really afford it, and cares not one iota about 'need'.

Types of Scarcity

There are two distinct types of situations we have to look at here.

Long Term Structural Scarcity

The first type of situation involves a long-term structural shortage. This applies to gasoline and oil. In New Orleans for the next several months it involves tree cutters, carpenters, engineers, cleaners, electricians, and a large number of experts. High prices will bring more people into the city to do the work that needs to be done.

However, we still have to consider the fate of the people who simply do not have enough money to pay the higher prices, or who can pay it only by giving up food, clothing, shelter, health care, or educational opportunities -- all of which cost money.

In the case of gasoline, rich people can consume gasoline without concern, contributing to a scarcity that drives prices up. As long as they want the gasoline more than other things, they can continue to drive the prices up. They could be using this on all sorts of wasteful activities; the market does not care. The market only cares about their willingness to pay. Meanwhile, the poor, who need to give up more important goods and services to get gasoline, are forced to pay whatever price the rich are willing to tolerate.

Ultimately, I believe that markets do a much more efficient job than government bureaucracies in allocating scarce resources. However, it is simply not true that markets channel resources to those who most need them.

Short Term Emergency

The second type of situation involves a desperate short-term need under emergency situations. These are cases where an emergency has generated a short-term immediate need for something that is typically easy to come by, but not in this case.

Under this description, we can include a case in which a car breaks down on a lonely piece of road during a blizzard. The driver sees the lights of a house nearby, bundles up the baby, and goes to the house.

The farmer, in this case, decides that he will let the stranded motorist and the baby use his house, but charges them a rate of $100 per minute (each) and $10,000 to use the phone.

We can include in this category somebody on a pleasure yacht coming across a life raft from a shipwreck. The owner of the yacht shouts down that he will sell passage on his boat for a mere $100,000 per ticket. Using the radio to call for help will cost extra.

We can imagine a case in New Orleans where somebody with a private helicopter flew from rooftop to rooftop willing to take on passengers at a rate of $10,000 per seat, or an individual with an SUV willing to drive somebody to safety at the same price.

When Stossel talks about selling water for $20 per bottle, this seems to be the type of price gouging he has in mind in this instance. These are examples of individuals exploiting a temporary, desperate need that some people may have in extraordinary circumstances.

There is no virtue here. These are evil and despicable people, fully worthy of our condemnation. Just societies consider these types of people to be criminals, and deservedly so.

The Store Owner

So, what is the morally responsible option if one is a store owner with a large supply of water, facing an emergency with a huge demand? Stossel explores two options. One is to sell the water (or give it away) in which case it will disappear too quickly, and those in need will go without.

The other option is to sell the bottle at an excessively high price, in which case the rich bid the price up beyond what the poor can afford, and the poor end up dying of thirst.

There is a third option, a morally responsible option, which is to sell the water at a reasonable price (and give it away to those who cannot pay), but limit the purchase to 1 bottle per customer (per day) until the crisis passes.

This is no different than volunteering to allow the stranded motorist to use one's house and phone, picking up the shipwreck survivors without charge, or volunteering to pick up stranded survivors and carry them to safety. These are the duties that a virtuous person willingly accepts.


Strossel warns us that there will be too few heroes in times of crisis, so we must allow the price gougers to seek whatever payment they can accept. If we fear that we will have a shortage of (potential) heroes willing to help others in a time of crisis, we need to make some more.

This is what morality is for. We praise those who help others, and condemn those who do not, just so that we will have a larger supply of those who help others when we need them.

Strossel's strategy, to praise those who shun kindness, and denigrate those willing to help, will have the opposite effect, making heroes more scarce in times of need.

Argument vs. Violence

In researching Stossel's article and other responses to it, I came upon "An Open Letter to John Stossel" at GreatScat.

The response changed Stossel's situation into one where a desperate parent shot and killed the store clerk. Desi, the author, ended the posting with, "Now my questions. Just out of curiosity, are you a Libertarian, and did you complete Economics 101? On second thought, however, your answers don't really matter. You're dead. Heh heh. Good luck with that journamalisming thing."

"...You're dead. Heh heh."

That crossed a line.

All things considered, if I had an option to choose my neighbors, I would much rather have John Stossel with his misguided libertarianism, or even the price gouger who will sell water for $20 per bottle only to those who can afford to pay, before I would choose Desi with her cheerful love of death.

There are too many problems in this world caused by those who cheerfully celebrate the deaths -- even if imaginary -- of those who disagree with them. These types of people have proved far more dangerous than "price gougers" could ever be.


Michael Bains said...

I have yet to read a more thoughtfully balanced analysis of gouging.

The trick in Emergencies is, of course, deciding when the emergency is over.

Also, those who cheer death do seem to court it.

Chad Van Schoelandt said...

"We can imagine a case in New Orleans where somebody with a private helicopter flew from rooftop to rooftop willing to take on passengers at a rate of $10,000 per seat, or an individual with an SUV willing to drive somebody to safety at the same price."

I think the main economist's argument here is that the positives of price gouging are not found in the disaster itself. But if someone with a private helicopter gets $10,000/person, then in the next disaster more people will fly their helicopters out there.

A similar thing can be said about gouging with water. When store owners see stories about $500 bottles of water selling out in a disaster, these other store owner may keep a large stock of bottled water and other emergency supplies. Areas will thus be better prepared.

As a further point, if enough store owners stocked up enough water, and enough helicopter owners came, then competition would limit the extent of price gouging on those things. Perhaps other things would be in short supply, and gouging would be high on those things, which sends a signal to stock up for the next emergency.

As for what virtuous people will do, they still need information of what is needed in a disaster. They might not think that water is in such need (obviously it is needed, but many might not realize how hard it is to find or the like) except for the signal which the price sends.

I would thus suggest a new distinction between gouging in repeated (e.g. floods) mass emergencies and isolated cases. When you pick up a floater for $100,000 we do not expect boat owners to start installing extra goods on their boats just in case they find a floater. Salvage companies do expand their fleets and increase their response time because of the ability to charge a lot to the owners of sinking ships however.

As for cases of needing to stay at the person's house, this is rare overall so is isolated. Some areas may have more of it, though, and expensive motels for breakdowns coulf be the start of a good business, and would draw others looking for similar profits, thus bringing competition and lower prices for better accomodations.