Realist, not conformist analysis of the latest financial, business and political news

Now, In The Coronavirus Epidemic, Is Exactly When We Do Want Price Gouging

If we have demand for something rising then we’d like to have some method of achieving two related things. Firstly, we’d like to sort through that risen demand in some manner and work out who should get those things there aren’t enough of. We’d also like to increase supply of those things so that the demand can be met.

We have a method of doing that – the price system:

The imposition of anti-price gouging legislation makes no economic sense and would have the opposite of the desired effect

Have you tried buying hand sanitiser this week? By all accounts, store shelves have been emptied of the stuff, in the wake of public health warnings about the coronavirus.

Social media is full of images of unfilled racks at supermarkets or chemists, with laments about how panic buyers are hoarding products away from those with compromised immune systems “who really need it”. As a result of the backlash, Boots is now even rationing purchases to two per customer.

Or, as someone more extreme even than Cato in this free market stuff points out:

Markey goes on to ask, “At what level is an item considered unfairly priced?” There is only one possible answer to that: the price which no one will pay. If someone will pay the price, then it’s fairly priced to them. If they didn’t think it was worth it, they wouldn’t buy it. The end.

The value of something is individually determined and cannot always be easily ascertained by observers in Washington, such as Markey. I, for example, place a negative value upon the “music” of Justin Bieber. Millions upon millions disagree with me and are willing to pay for his “music.”

The fair value of a product is what we, consumers, are willing to pay.

If boxes of face masks are $10, sure, I’ll have one. But if they’re $400, I’ll pass — only people in true need will pay that much. The result? I end up not using a face mask to feed my cat while a doctor does get one to treat sick patients.

This is the miracle of the price system. Or, as Markey would call it, “price gouging.” I say, all hail price gouging! And fie to the fools who would stop us using the only efficient allocation method we’ve got.

Then again, sadly it’s possible to get fired for telling people these obvious truths.

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Ben S
Ben S
4 years ago

Unless you are very very rich and want a face mask to feed your cat (and maybe one for the cat too), and the doctor who (objectively) needs one is only treating people with low revenues.

Ergo, how much you’re prepared to pay isn’t directly correlated to how much you want/need, it’s also highly dependent on how much you have.

TD
TD
4 years ago
Reply to  Ben S

true, but as the theory goes, successful gouging will cause more providers to get into the market with the latter gougers willing to undercut the early gougers. And the need ultimately is met faster that way, and prices will fall.

James
James
4 years ago
Reply to  Ben S

This is an edge case. The vast majority of people in the UK have income near the mode. Therefore price discrimination will be a good discriminator of need.

However the state must also guard against the rational actions of perverse actors. In the Bengal famine during WW2 local merchants brought all the grain and stored it because prices we rising and I suggest, because those dieing were of a different religion/caste. This was rational but undesirable.

Therefore although price rises are essential to maximise utility rationing is also required.

Esteban
Esteban
4 years ago

Largely true Ben, but no one has ever devised a system that is fine tuned or “fair” enough to sort through the details of peoples lives to get this “right”. What centuries of experience have shown is that markets are the best thing we’ve ever found.

Spike
Spike
4 years ago
Reply to  Esteban

Especially as the political system’s concept of “fairness” is not only unfair but disastrous. Regarding our SERIOUS pandemic, we did not quarantine those likely to spread the virus, but granted them special rights, legal recognition, and protection against hearing disagreement, and made refusal to do business and offering counseling a crime.

ifabloke
ifabloke
4 years ago

I’m not an economist, but may I suggest something that could be called ‘premium pricing’. “Yes, sir, we have some face masks: $10 for one, $30 for 2, $50 for 3, $100 for 4………just the one then, sir?” Or, would that be too difficult for governments to apply?

Spike
Spike
4 years ago
Reply to  ifabloke

No, but obviously trivial to evade. Massachusetts meals tax used to exempt “meals under $1.” It was the only place where the cashier asked, “How many is this for?” and the answer, of course, was 42.

Esteban
Esteban
4 years ago

The answer to your question is “yes, that would be too much for the government to sort out”. We’ll all die of the virus while they’re still designing the new logo for headquarters.

James
James
4 years ago

Technology can help. Most goods are sold through the big supermarkets. Prices can float freely and profits deriving from rentholder sources (right of supply during crisis) can be returned to users (or paid to the taxman). This solves the presentation issue – think Tampon Tax rebate.

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