Economists frequently react to events differently than most people. Often, critics of economists will say something like “sure, it’s easy for you to say that because of the position you are in, but if you were in the shoes of someone who has to experience it I bet you’d change your tune!” For example, economists don’t view so-called “price gouging” as a terrible affront – but maybe that’s just because those economists have never been on the receiving end of price gouging, and if they ever were, they’d reconsider. But such critics shouldn’t be so sure. The economist John Cochrane recently explained why his experience being on the receiving end of “price-gouging” was positive:
Uber surge pricing was an important lesson to me. I loved it. I could always get a car if I really needed one, and I could see how much extra I was paying and decide if I didn’t need it. I was grateful that Uber let me pay other people to postpone their trip for a while, and send a loud signal that more drivers are needed. But drivers reported that everyone else hated it and felt cheated.
Cochrane also describes his mother being outraged when they tried to find a hotel room in what turned out to be the midst of Woodstock II. Eventually, they found one at a Super Motel 8 that was going for significantly more than that chain’s typical rate. He tried to reassure his mother that the room being available for a high price was, in fact, a thing to be grateful for:
I tried hard to explain. “If he charged $50, or $100, those rooms would have been gone long ago and we’d be sleeping in the car tonight. Thank him and be grateful! He’s a struggling immigrant, running a business. We don’t need presents from people who run Super-8s in upstate New York.” But, though an amazing, smart, wise, and well-traveled woman, she wasn’t having it. Nothing I could do would persuade her that the hotel owner wasn’t being terrible in “taking advantage of us.”
My own experience of this comes from the other side of things – being in a situation where there was no “price gouging,” and wishing there had been.
This was back in 2016. I was leaving my job at the Medical University of South Carolina in Charleston and moving to Minnesota. Most of my belongings had been picked up by movers several days prior, and I was going to drive out that weekend. However, a few days before I was originally set to leave, Hurricane Matthew would be arriving in Charleston. So I decided to wake up extra early the next morning and hit the road a few days earlier than I initially planned.
When I woke up the next morning, I realized I had screwed up. My gas tank was very low, bordering on empty, and I had a very long drive ahead of me. So, I needed to get gas. And what I found was that even at 4:30 in the morning, every nearby gas station had a tremendously long line for each pump, as people prepared to leave the area ahead of the hurricane. However, the price of gas had not changed at all – no price gouging to be found here! And that was worrying to me.
Everyone needed gas, but not everyone needed it equally. I’m sure that many people in that line, as well as those who had filled up and left in the prior days, had tanks that were near or mostly full but wanted to “top off” before hitting the road. Then there were other people like me, whose gas tanks were running on fumes and who wouldn’t even be able to make it ten minutes down the highway to hit up a gas station in the next town over. In a perfect world, the remaining gas would go to people like me rather than those with mostly full tanks. And that’s exactly the sort of world that price signals will tend to steer us toward. If the price had been allowed to rise, someone who already had three-quarters of a tank of gas might have thought “It’s not worth filling the rest of the way up at this price, I’ll just head out now and get gas when we are a few hours down the road.” Each person who made that kind of decision would leave that much more gas behind for people in a situation like mine, where it really was a “now-or-never” scenario. I’d have cheerfully paid an extra couple of bucks a gallon to be assured of the ability to fill my tank, rather than having a serious risk of getting stranded next to a gas station advertising a “fair” price alongside their empty gas reserves.
Luckily it didn’t come to that – I was eventually able to get to the front of the line and fill the tank. I also noticed that the flow of gas coming out of the pump was slower and weaker than I’ve ever experienced before or since. I was lucky – if I had been an hour later leaving that morning it’s very likely there would have been no more gas left at all, and I’d have been stuck with a hurricane bearing down on me. And I wouldn’t have felt at all like I had been protected or looked out for by the laws that kept the price of gas from rising. John Cochrane was grateful for the high prices he got to pay – and I was immensely distressed at the low prices I had to pay.
READER COMMENTS
nobody.really
Aug 30 2024 at 2:55pm
Off topic: Kevin Corcoran argues that allocating gas at a uniform price to the next person in line is arguably inefficient. But surely people with more gas in their tank could see the long lines and conclude that THIS price–the price of waiting–was more than they wanted to pay, given their option to drive away from the storm zone and find a different gas station (presumably with a shorter line). Because Kevin Corcoran lacked that option, he had a less elastic demand, and was therefore willing to pay the price of waiting.
But is there a more efficient way to organize lines? Steven Landsberg thinks so. I’m less confident.
steve
Aug 30 2024 at 3:45pm
Yes, I have often wondered why waiting time is not considered a cost. I guess the claim could be made that one was short on time, but then shouldn’t that also hold when we are talking about people being short on money? In one case you are rationing by money and in the other by time. (At least in discussion of medical policy and economics we often consider time as a cost. Seems odd other branches of economics would not do so, or at least not often.)
Also, didnt Arrow do some work along this line? Suppose there is a loss of power in the summer. There is one generator left. A person with limited finances wants to buy it because his cancer meds need to be kept cold. He likely dies or gets very sick without them. The wealthy guy just wants one so he can keep the house at 72 degrees rather than 80 degrees. Obtaining the generator is really not related to need but ability to pay. I think his conclusion that it often made sense to ration by costs but there are times when doing it by lottery might make more sense.
Steve
JFA
Aug 31 2024 at 7:22am
It is always considered a cost in the calculation. One reason why this cost is particularly abhorrent is that it produces nothing. the thing about monetary cost is that money is fungible. Time, however, is not. By not allowing “gouging”, the government is just making people wait in line when they could have been doing something else. There’s no reason to think that allocating by waiting in line would increase the probability of the resource going to the “highest need”. You mostly just incentivize those with a low value of time to get in line, plus the rich guy can just pay someone to wait in line and fill up his car. Allocating through queues just about guarantees wasted resources.
Think of it this way, if there was a seamless way for a person who placed a high value on gas (either because they need to leave sooner or its a charity or hospital that needs to fuel a generator to power medical refrigerators that keep medications cold) to pay people in line so that he could get closer to the front, the person at the end of the line (realizing that the line is now longer than what they would be willing to wait) would take the money and drop out. That person now has money in their pocket and time on their hands and the other guy has gas in his car. Everyone is better off. With so-called “gouging”, that extra money goes to the gas station, which would allow them to pay a higher price for any future deliveries to get gas to that location sooner that other locations.
steve
Aug 31 2024 at 10:00am
You ignore the fact that not everyone has the same amount of money. If everyone had the same amount of money then I think this works. However, they dont so what it means is that those with the most money are able to buy regardless of need. Also, the idea that time is not a factor in whether or not to wait in line is just not true. I suspect nearly everyone has faced a line (I have including the long gas lines of the 70s) and willing to spend enough time is factored into waiting or not.
Waiting is abhorrent to those who have the money and would be willing to spend more. High prices are abhorrent to those who dont have the money but are willing to spend the time to wait. This is really about tradeoffs with money alone vs time being the extremes on the spectrum. The reality is that in many, if not most businesses, you are dealing with some combination of the two. Charge more for your food, shorter waiting lines. Charge less, longer lines. One way to help think about this is that if you dont have money waiting times become infinite.
Steve
JFA
Aug 31 2024 at 12:01pm
“Also, the idea that time is not a factor in whether or not to wait in line is just not true”
where did I say it wasn’t a factor? I started my comment saying that it is always considered part of the cost.
steve
Aug 31 2024 at 2:04pm
“There’s no reason to think that allocating by waiting in line would increase the probability of the resource going to the “highest need”. ”
I would agree that my response was overstating this, but this seems to me almost the same as saying time doesnt matter. I think it’s pretty clear that time is often pretty effective at sorting out who wants or needs something the most. Lines at concerts, movies, sporting events seem to sort that out. The only thing you really know if you ration by money is that the people with the most money will be able to buy. They might want or need more but you wouldn’t know.
Steve
Kevin Corcoran
Sep 1 2024 at 8:19am
Um…not considered a cost, by whom? Surely you can’t mean that “waiting time is not considered a cost” by economists, and certainly you can’t mean “waiting time is not considered a cost” by market friendly economists in particular. Because economists generally, and especially free-market economists, not only consider time to be an important cost, they talk about this cost and its importance all the time (pun somewhat intended). It would be borderline impossible to have done even a cursory reading of basic economics without coming across the importance of time as a cost being heavily stressed throughout – and again, to an even greater degree if one has done even a minimal amount of reading of the arguments of free-market economists. Economists love pointing out that prices are just one way to ration resources, and that another way is time, and that artificially lowering prices has the effect of increasing the time costs paid in order to avail oneself of some resource, because adjustments can always be made along multiple margins. Think, for example, of how economists quickly point out how the lack of out-of-pocket costs for medical care in Canada has the result of drastically increasing the time cost people pay with excessively long waits to receive care in Canada. I recall in the EconTalk interview with the doctor who runs a cash only, no-insurance-accepted surgery center mentioning a significant fraction of his client base is made up of Canadians who desperately need medical care but will have to pay with years of waiting to get it in Canada, but can get it immediately if they fly to Oklahoma.
Or consider what health economist John Goodman has said:
So if you were claiming that economists fail to recognize time as a cost, the only possible reason you could say so is if you haven’t done even a minimal reading of basic economics, because it would be impossible to have both done that and still think economists don’t factor time as a cost – and a very important cost at that! In which case, I’d suggest reading more economics – it’ll be worth your time! 😛 (Or maybe you were just claiming that non-economists don’t consider the importance of time cost? In which case, sure, I agree with you about that.)
Of course, economists also point out that using time instead of pricing to ration has serious downsides – it’s far less efficient, it causes significant deadweight losses, and its distributional effects should be worrying to those with egalitarian scruples. That is to say, increases in the time costs disproportionately harm and disadvantage the poor compared to the rich – to a significantly greater degree than increases in money costs. Higher money costs and lower time costs produces better outcomes for the poor than the reverse.
steve
Sep 1 2024 at 4:05pm
Actually, I specifically noted that time is often counted as a cost in medical economics, and you proceeded to cite examples in medical economics. However, in the rest of the economic literature it doesnt get that much attention. As i have noted before, economists will often note outcomes but now how long it took to achieve and what were the effects until the final outcome.
Steve
Kevin Corcoran
Sep 2 2024 at 7:36am
And that last statement is just wildly untrue – it receives massive attention throughout the economic literature, not just in medical economics. Nor is it true that I only pointed to examples from medicine – one of the examples I linked to was of Don Boudreaux of Cafe Hayek talking about the massive time costs caused by gas lines due to price controls on gasoline, and his own experience with those costs. The New York Times article I linked to also talks about time costs in a wide variety of areas and activities, and how time costs are even more disadvantageous to the poor than money costs – not just in medicine, but in all areas. Or these two economists who wrote an entire book making that same point. Or how economists have described how in command economies, people had to wait for years to be able to buy a car. Or the literature where economists point to and criticize the long times people had to spend waiting in line for food and other basic provisions as a major cost created by price controls. I also quoted Cochran talking about time as a cost when there is a shortage of Uber drivers, and how to price for that cost. Or there is this case where the trade off between time and money is considered for things like restaurants or Disney park fast passes. Seriously, the economic literature is absolutely flooded with economists talking about the very thing you claim it never talks about. If you say you’ve never seen it discussed outside medical economics, then I guess I believe that you haven’t seen it, but that could only be the case if you haven’t looked. Because if you have, you would see it all over the place without even needing to try. And it’s fine if you haven’t looked, for what it’s worth, not everyone has time to look through everything. I certainly couldn’t tell you anything that’s going on in the sportsball world, because I never spend any time looking into that. Mostly because I find it boring. But I find economics very interesting, and I’ve been reading all I can of it for years, and I see the thing you say never gets discussed being discussed and highlighted in great detail all the time.
Kevin Corcoran
Sep 2 2024 at 9:01am
Incidentally, you could also consult the economic encyclopedia available on this website to find, for example, this article on price controls talking about how time is an important cost – and in the context of gas lines too!
Or this article on the economics of urban transport, which also counts time as an important cost:
Seriously – time as an important cost is literally everywhere in economics!
Dylan
Aug 30 2024 at 7:11pm
I agree with Nobody and Steve that waiting in line should have a similar impact on demand as a rise in price. Of course, the rise in price has the benefit of encouraging new supply into the market, long lines probably don’t have the same effect.
The thing I’m surprised about is, given your circumstances, why didn’t you attempt to bribe the people in line ahead of you? Surely for the right price, people would have been happy to give up their place in line?
John
Aug 31 2024 at 7:23am
This is absurd. While I agree that “price gouging” doesn’t truly exist in laissez faire markets, it is hardly ever a good thing to experience.
In a perfect world, the supply would never run out and nobody would need to gouge their price, right? Is this not what the ideal state is for the free market? Price gouging is “good” in a sense that it is a gigantic flag signaling that more of something is necessary, but it certainly is not “good” for the people who had to pay a lot for something they normally get for cheaper.
The problem with price controls is they distort the market, lead to bankruptencies, and mass unemployment and shortages. Price gouging isn’t good either in many situations like monopsony and monopoly economies or economies with lots of central planning because there are no incentives to bring prices down.
Jon Murphy
Aug 31 2024 at 11:18am
I don’t know. My experience having lived though several natural disasters is that I’d rather have goods available to buy at a relatively high price than none available to buy at a low price.
True, I may not like paying a relatively high price, but it is certainly good that more of a good is available post-disaster when the price is relatively high than when the price is relatively low.
steve
Aug 31 2024 at 2:08pm
How would you have felt if you could not have afforded the higher prices?
Also, is there really any empirical evidence this is how things work?
Steve
Jon Murphy
Aug 31 2024 at 2:17pm
Having been in that situation, the same. It’s easier to ask and get for charity when goods are available than when their not.
And yes, the evidence is indeed overwhelming that when prices are allowed to rise more of a good comes to the market, people conserve what they have, and shortages disappear. Indeed the evidence is so obvious most are oblivious to it (like how it is obvious we need air to live).
steve
Sep 1 2024 at 4:11pm
So your answer is that you ask for charity and hope that eventually you receive it?
The evidence is overwhelming, and I agree that you see it frequently, in non-emergency settings. Charging more for hotels in-season, charging more for coffee when there is a coffee bean crisis, etc., and maybe my search skills are lacking, but I haven’t sen much other than models for true emergencies.
Steve
Jon Murphy
Sep 1 2024 at 5:17pm
That is one way, yes.
I assumed you had meant emergency situations. My comment about overwhelming evidence was discussing price gouging legislation in emergency situations.
Kevin Corcoran
Sep 1 2024 at 8:21am
Like Jon, having also been in exactly the situation you describe, my answer is also the same. And Jon is correct that there is an abundant empirical literature on this, and the evidence is pretty overwhelming .
Dylan
Sep 1 2024 at 4:37pm
Kevin,
I’m genuinely curious why you wouldn’t have used money in the situation you described in your post to “jump the queue?” Money and time are reasonably fungible in some circumstances like this one. You can pay people to cut in line, or wait in line for you. Or you could offer to buy the gas from someone that had already purchased it, for more than they paid. And, if you don’t have money, you can often substitute time instead.
My guess for why you didn’t even attempt this is social norms. Trying to bribe your way up the line would be seen as cheating by a large number of people, and because of that, the price people would charge would be high, probably higher than you were willing to spend even in these extenuating circumstances.
I have a feeling that, social norms have evolved that in times of disaster, where supplies in the short run are presumed to be relatively fixed, we have collectively decided that we’d prefer to ration by time instead of price. And these norms are strong enough that, even though economists tell us that a rich person has all sorts of ways to evade the price gouging laws, in practice we don’t see that much of that,
Kevin Corcoran
Sep 2 2024 at 7:44am
Hey Dylan –
It genuinely didn’t occur to me to do that. Maybe it was too outside of social norms. Or maybe I was just too distracted with how panicked I was over the whole situation. I do suspect you are correct that “price people would charge [to jump the line] would be high, probably higher than you were willing to spend even in these extenuating circumstances.” Or more accurately, higher than I would have been able to spend. Particularly because at that point, I was very strapped on money. I was only a year and change out of my “broke college student” life and the costs of moving to Minnesota left me with very little reserves. While I could have afforded enough gas to get out of the immediate area if the market price had been allowed to rise, and saved myself the time waiting and psychological panic from the fear that I might be stuck, I doubt I’d have been able to afford to pay others to wait even longer in line and risk themselves getting stuck as well. Which is another reason I wished those laws hadn’t been in effect.
Monte
Aug 31 2024 at 10:41am
Most of us think of price gouging as unfair, which causes us to think in zero-sum terms despite the fact that these transactions are voluntary and mutually beneficial. Zero-sum thinking is a cognitive bias difficult for us to overcome and one easily exploited by politicians. Price gouging is perceived as unethical and is illegal in most states, yet it’s utility maximizing for both the buyer and the seller.
Conversely, when distressed sellers are forced to sell below the market price, consumer surplus is maximized and is perceived as a good thing, even though it might lead to shortages and financial strain for the seller, sometimes forcing them to go out of business. This transaction is asymmetric and one in which the buyer benefits significantly at the expense of the seller, yet there seems to be very little, if any, outrage.
Which begs the question: Which should we have more of?
Robert EV
Aug 31 2024 at 3:55pm
You’re talking about profit margins. “Price gouging” is an extreme on the profit margin in a particular circumstance. It could be justified in some scenarios, but so can the corresponding utility maximizing step on the part of the “buyer”: theft.
Even if it’s better for them in the big picture, people don’t like large, unexpected changes: https://en.wikipedia.org/wiki/Region-beta_paradox
Robert EV
Aug 31 2024 at 4:01pm
And I for one, like probably most other regular consumers who habitually go to the same stores, am disappointed when a store I frequent goes out of business. This is not seen as a good thing. Getting my last shopping trip of items at a discounted price is just a salve to the much larger wound.
I was also disappointed when my finances got to a point when I could shop at Pier 1, and bought some great plates and wanted to go back and get more, but alas, that was the very month they went out of business.
Monte
Aug 31 2024 at 5:15pm
Umm…I’m having trouble equating the justification of theft under like circumstances to price gouging. The two are fundamentally different in that one is exploitative, while the other constitutes a direct (and illegal) breach of personal property.
Thanks for the link to the region-beta paradox article. I wasn’t familiar with it, but it’s an interesting concept. I’ve always wondered why the stress of a major inconvenience seems to linger compared to that of an emergency situation over which I have no control. Now I know why.
Robert EV
Sep 1 2024 at 1:13pm
I’m basically trying to draw attention to the full spectrum here. “Justification” may have been a poor word to use. I certainly don’t mean it here in an ethical sense, just a personal sense.
Price gouging, like short selling, can keep going up forever, while theft, like purchasing a stock, has a limit on losses. We see this historically when people were forced to sell themselves and their family into slavery over debts. But to flesh this out financially:
Theft robs the seller of the replacement cost (R) of the stolen item as well as the expected profit (P), plus some opportunity costs (O). Price gouging balances this out when (assuming O is zero) the expected sales price from price gouging is 2(R+P).
You obviously get other effects such as overhead or the resale market as Monte cites. Which is one reason why a company would price gouge in a disaster: They aren’t going to have any profit for some days, as they can’t resupply, or even stay open if they still have items. But that sort of thing is more complicated than I can go into. Suffice to say, the consumer and the seller are both losing out when a natural disaster hits (depending on industry).
Robert EV
Sep 1 2024 at 1:35pm
I follow a left-wing anti-COVID (i.e. pro-masking, air filtration, etc.) blog called okdoomer. The blogger, Jessica Wildfire, had an article about the region-beta paradox just a few days ago.
Robert EV
Aug 31 2024 at 3:50pm
If an item runs out and is not available, the incentive to rent the item (say, by hitching a ride in the hurricane example) increases, while the incentive to steal it decreases. With price gouging the incentive to steal increases.
Jon Murphy
Sep 1 2024 at 9:10am
Two problems here:
1) If the item “runs out,” there are none to rent.
2) I don’t see how the incentive to steal rises as prices rise. I am unaware of any study that finds such a conclusion, too, though I haven’t looked for one. It seems to me the logic would be the other way ’round: if one cannot acquire a good legally (such as with shortages due to price gouging legislation), then the incentive to steal would rise. And given we do see theft increase when the price mechanism isn’t allowed to work in other countries, I think that’s strong presumptive evidence to my point.
Monte
Sep 1 2024 at 11:39am
One such study I found that examines this relationship is The Effects of Economic Conditions on Crime Rates: Evidence from the United States by Richard Rosenfeld and Robert Fornango (2007). According to Rosenfeld:
Jon Murphy
Sep 1 2024 at 11:41am
Interesting. That’s for sharing. I’ll have to dig in and see how they address the counterfactual.
Monte
Sep 1 2024 at 12:14pm
Of course, theft incentivized by a price rise due to inflation vs price gouging occurs under a totally different set of circumstances.
Robert EV
Sep 1 2024 at 1:00pm
So I guess people steal when prices rise and also steal when things aren’t available. Jon and I are both right?
Jon Murphy
Sep 1 2024 at 11:36pm
It’s an interesting paper. Not sure how strong their conclusions are; they just run a few regressions and call it a day.
That said, I can see a plausible story. And we have seen increase in theft in recent years too.
For the sake of argument, we’ll accept their conclusions as correct.
Even given an increase in theft, I’d still oppose anti price gouging legislation. As I was saying to Steve above, I see increasing the goods that are avalible as the main issue here. Allowing prices to rise does that by increasing the incentive for people to bring goods to the market and by encouraging conservation and discouraging hoarding of the good in question.
Dylan
Sep 2 2024 at 8:40am
I think this is the right answer. I suspect that anti-gouging laws during disasters have support because people underestimate the elasticity of supply. During a disaster situation, where people can’t get in or out of town, people think that supply is fixed, so allowing prices to rise just helps the merchants while exploiting people in bad circumstances. Of course, allowing prices to rise can bring in “new” supply even when no one can get in or out. People have gas sitting in all sorts of places that could be brought to market if the price is right to make it worth the trouble.
My intuition though is that, the closer you are to a situation where supply is truly fixed in the short term, the more likely it is that the benefits in social cohesion of anti-price gouging norms (whether laws or just by custom) are going to outweigh the benefits of allowing prices to float. I don’t have any support for this other than the fact that these laws appear to be so broadly supported, and even people like Cochrane’s mother, who one assumes was in a position to afford the inflated price, have such a revulsion to it.
Robert EV
Sep 2 2024 at 12:56pm
@Dylan
In emergencies people also have “gas” in containers that can be diluted with water or diesel or kerosene. Not enough to immediately brick the auto of the person they are selling it to, but enough to damage it later on. Not all such adulteration can be malicious. Some might not even know that kerosene or alcohol or whatever may be damaging.
Robert EV
Sep 1 2024 at 12:58pm
“1) If the item “runs out,” there are none to rent.”
I think generally people find that things are divisible and sharable far more than we initially think of them as being. It’s only when they become limited that we, in the modern economic system, start thinking in this old way again.
I recall a story of a person renting a tent on someone’s property to live in in the SF bay area. That’s an extreme, but historically other extremes such as hot bunking, bunk beds, and the like were happening in the major shipyard towns during WW2.
Jon Murphy
Sep 1 2024 at 11:19pm
That doesn’t seem particularly relevant to the conversation here.
Robert EV
Sep 2 2024 at 1:06pm
I literally mentioned hitching a ride out of the hurricane zone further up.
While price gouging violates social norms, as discussed above, rationing doesn’t. And seems to address some of the root of Kevin’s gasoline issue.
Right now Kevin is assuming that those people wouldn’t have been waiting in line if price gouging was allowed, or at least wouldn’t have been filling their tanks up or topping them off. He expects price gouging to act as a market rationing system. But this discounts the effect of fear and the scarcity mentality on people’s actions. We’re talking about a natural disaster. The rationality of people responds differently in such cases than in normal times. With something like a hurricane that most people are at least somewhat used to maybe they will react the way Kevin expects. But at least some of them won’t. Where this balances out, I do not know.
Robert EV
Sep 2 2024 at 1:42pm
It isn’t clear in what I wrote, but part of what I’m trying to say here is that increasing the price may have the counter-intuitive effect of triggering someone’s scarcity fear into buying as much as they can of the item (since they can afford it). Whereas with the normal price they might just fill up what they need, knowing (or expecting) that it won’t be that hard to fill up again later on.
I do not know that this will happen. I just don’t think that Veblen goods are the sole time we see this counter-intuitive behavior. I think price increases on one-time, one-off necessities (gas to leave an impending disaster) may be one of the other times we see this behavior in some people.
Thomas L Hutcheson
Sep 4 2024 at 12:30pm
Gouging maybe bad or not, but what is clear is that it has no relevant for inflation; that’s the Fed’s business.
Comments are closed.