Sunday, November 4, 2012
Let's be honest, gouging isn't very nice
I've noted my support for leaving prices along in disaster zones on this blog before, but one thing I've been meaning to talk about is that it still doesn't seem particularly nice to gouge. Clearly there are extra costs in a disaster zone. If you are incurring those costs obviously you have reason to raise your prices. But raising them because the market will bear the raised prices doesn't seem very nice. I think most people's instinct in a crisis is to be more generous, not to take financial advantage of it. You have to wonder about the sort of people who raise prices simply because they can (again - if they're incurring extra costs obviously they have good reason to raise the price).
Well, that raised price is what signals suppliers and distributors to steer more goods to that region. It may not be "nice", but it is certainly necessary. Eventually, when supply increases enough the price comes down, but you have to give that signal first in order for this all to take place. It goes well beyond merely taking advantage of the situation.
ReplyDeleteI'm not trying to talk down to you, I know that you know this stuff. But I don't think in terms of "nice" or "not nice", I think in terms of what is required to get goods to those who most need them. The increase in price ensures that the goods go to the most highly-valued ends. If you can do without the good for a while, then certainly there is no need to purchase it. It isn't as if you've been wronged in any way, it's your own valuation that determines how much that good means to you, and if it's price is higher than your own valuation, then that's on you.
If there is a critical situation (such as a person dying) that requires gas to fix it (drive them to the hospital), then I would much rather that the good be available at a high price than to not be available at all. In fact, I think that this is where human generosity will likely come in, because if you cannot afford to buy the gas to drive your dying friend to the hospital, I am sure that many people would be willing to give you aid in coming up with the money. But you at least have that option.
True (and as you say, I know this and have talked about this earlier).
DeleteI do think the case can be overstated. Everyone knows NJ needs gas. If you transport it there at cost, you can also infer that you can charge pretty high prices.
I think, deep down, if you came across a guy that told you he charged an arm and a leg because he knew he could wring it out of them, but it was all OK because he was sending a signal to other suppliers, I think you'd be a little creeped out by him.
DeleteI don't think that most people would be aware that their raising of a particular price does indeed steer more activity towards those ends (due to profit opportunity), but in terms of economics, it is very important that this process does take place. Like I said, I would much rather have the option to pay a high price for a good (esp. in times of dire need) than to not have the option of purchasing that good at all.
DeleteYes, everybody knows that NJ needs gas. However, in a world of scarce resources, where there are only so many resources to be used for various ends at any given time, there needs to be an incentive in order to supply one region vs another. If you're expecting humanity to all of the sudden become non-cognizant of cost, then you're going to be waiting quite a while.
"The increase in price ensures that the goods go to the most highly-valued ends."
DeleteAssuming an equal income distribution.
Remember, not charging that higher price is indeed a cost.
DeleteUnlearning, I don't need to make that assumption, because most people have family, friends, circles, tribes, groups, etc that they can look to for support. If there was a guy that was dying and all that was needed was $20 to get enough gas to get to the hospital, I don't think that it would be very hard to round up the money through donations or loans. Further, one can sell assets in order to raise the funds necessary. If they instead decide to not sell the asset, then this certainly proves that getting gas was not the most highly-valued end. In fact, the same goes for those who refuse to help by donating or loaning the money; if they don't do so then they value that end less, thus it is not the most highly-valued end.
DeleteFurther, equal income distribution is not necessary at all, and in fact, present income isn't even a necessary consideration. One word: savings.
Delete"Unlearning, I don't need to make that assumption, because most people have family, friends, circles, tribes, groups, etc that they can look to for support."
DeleteDifference: if your family are millionaires. Also note the use of the word 'most.' Not all do.
"If there was a guy that was dying and all that was needed was $20 to get enough gas to get to the hospital, I don't think that it would be very hard to round up the money through donations or loans."
That's good to hear. Speaking as someone in a country with free healthcare, I can say I'd rather not chance it, especially if I were dying.
"Further, one can sell assets in order to raise the funds necessary."
...except if one doesn't own assets.
"In fact, the same goes for those who refuse to help by donating or loaning the money; if they don't do so then they value that end less, thus it is not the most highly-valued end."
Good to hear that whether or not I died would depend on whether richer people than I valued my life sufficiently.
Fact is some people will have the ability to pay and some won't. To deny that is to stick your fingers in your ears.
"Fact is some people will have the ability to pay and some won't."
DeleteEvery organization is dedicated to solving a problem. The amount of revenue a private organization receives reflects how successful it is at solving a problem. The same cannot be said about public organizations...and that's a problem. The solution is simply to allow taxpayers to choose which public organizations they give their taxes to.
Whether you want healthcare for yourself or for others...you've got to have the freedom to use your own money to indicate which organization is most effectively/efficiently providing healthcare.
Why's it got to be you? Because it wouldn't make sense for it to be somebody who doesn't value healthcare enough to put their money where their mouth is.
Why's it got to be your own money? Because you earned it...which means that you will expect results. You will want the most bang for your buck. You will want more for less.
Why's it got to be a choice? Because without your choice there's no incentive for organizations to provide more for less.
What's the best solution to the healthcare problem? If you and I sat down then we're probably not going to agree on a specific solution. But perhaps we'd both agree that an once of prevention is worth two of cure.
Of the millions and millions of taxpayers who truly value public healthcare...how many different approaches do you think they would support with their own taxes?
We don't solve problems with homogeneous activity...and the government is the epitome of homogeneous activity. We solve problems with heterogeneous activity...and the market is the epitome of heterogeneous activity. Anybody who truly understands the opportunity cost concept should understand just how easy and valuable it would be to create a market for public goods. Creating a market in the public sector would be as easy as allowing taxpayers to choose which government organizations they give their taxes to.
Is leaving everyone out at the back of the line any nicer than leaving those out who don't have a high enough effect WTP?
ReplyDeleteAs I've said before, I'm not sure WTP or ATP are going to be binding constraints in most of these cases. So I'm not really convinced that raising the prices is really doing that sort of separating job.
DeleteThat's why I'm a lot more comfortable with quantity rationing.
There's going to be a lot of people left at the end of the line anyway, and they're all going to be willing to pay.
They obviously don't need price to steer goods anywhere; they are more than willing to direct them to where they are wanted, they operate under monopolistic competition after all. Not nice is important because it demonstrates a social cost, one that isn't represented in the market, or perhaps is and is very high which is why raising prices is an anathema to most everyone. Raising prices is an autistic solution to a problem that doesn't really exist.
ReplyDeleteGiven that there are only a particular amount of goods available at any given time, what incentive do suppliers have to steer a greater amount of goods to one particular region vs that of another region? Further, what spurs greater production of the good in a world of scarce resources?
DeleteAs opposed to shipping gas to stations without electricity or shipping chainsaws to Canada for next years use? What great industries are waiting for disaster to do what they never would otherwise? What industries are so profitless that being deprived of price gouging they cease to exist? Autistic is written all over this.
DeleteThe fact is that the world produces enough goods and services for everyone to have some level of basic needs. Production is not the issue; distribution is.
DeleteI never hinted that this was necessarily a production problem, because I know that there is more than enough production capacity to handle this particular problem. Yes, it is primarily a distribution issue, but that does not negate the fact that there is only a particular amount of goods at any given time. If you have the choice of distributing that set amount of goods to a region that has a market price vs that of a region with a price control below the market price, you're going to go with the one with the market price. The very fact that price controls are present (along with rationing), and that shortages are the actual viewable result, shows that this market mechanism is working exactly as it should.
DeleteIt isn't a matter of there being enough goods to go around per se, it is more or less whether or not the owners of those goods see an incentive to part with them at a particular price.
There's going to be a lot of people left at the end of the line anyway, and they're all going to be willing to pay.
ReplyDeleteSo you don't believe in supply and demand curves now? This is getting unreal.
No, I believe supply is informed by social norms - lots of people will agree with me that price gouging isn't nice.
DeleteI believe that demand for things like gasoline is relatively inelastic anyway and certainly in this case, that supply received a big negative shock, and that search frictions are so substantial in this case that I doubt price adjustment is going to be the limiting factor in most cases. There are going to be a lot of non-market margins that affect this and there's going to simply be a lot of luck associated with getting to gas that has nothing to do with WTP.
You may want to call that "not believing in supply and demand" because I'm not just relying on supply and demand to think about this, but I think that would be misleading. I haven't abandoned any principle of supply and demand, after all. I've just added some other thinking to it.
Yes Daniel, if I understand your response, you no longer believe in supply and demand. Meaning: You don't think it is right to say that there would have been a market price that would have balanced quantity supplied with quantity demanded, taking into account all of the factors you are describing. And that's why you can claim that with or without price controls, there would be a line of people wanting gas and people at the end not getting any.
DeleteSo anybody that thinks search frictions and norms are important doesn't "believe in" (whatever that phrase is supposed to mean in this context) supply and demand?
DeleteThis would surprise a lot of labor economists I think.
The whole reason why search and that sort of thing is brought in is to supplement supply and demand on these sorts of questions, not because we don't "believe in" supply and demand. I genuinely don't understand your point, unless you're just pointing out that I don't think supply and demand should be the only tools in our modeling toolbox.
And non-gouging is not-nice to the people willing to dip deep into savings to buy stuff that they desperately needed when the non-gouger emptied his inventory in five minutes.
ReplyDeleteSeen. And. Unseen.
You can be really nutty.
DeleteHow is sacrificing potential producer surplus hurting anyone. Nobody has a right to buy prices at higher than other folk are willing to buy it.
Next you're going to be telling me volunteers are not nice for just giving away their hours to people. The nerve!
Seen and unseen! Seen and unseen! If I yell "Bastiat" loud enough they're sure to be tricked into thinking I understand him!
How is sacrificing potential producer surplus hurting anyone. Nobody has a right to buy prices at higher than other folk are willing to buy it.
Delete??? You realize, don't you, that the *whole point* of this is discussion is distinguish between "you have the right to do that" and "that's nice of you". So why are you bringing up that people "don't have the right" to buy at prices higher than other others are willing to pay? (even though they do, and that's exactly how markets normally allocate, but whatever)
My point is non-gouging may be "nice" to some, but only by being "not nice" to others. You ... don't think that speaks to the point you're trying to make in your post?
Or you don't see how incurring an avoidable large opportunity cost in producer (AND consumer) surplus resembles a "hurt"?
Seen and unseen! Seen and unseen! If I yell "Bastiat" loud enough they're sure to be tricked into thinking I understand him!
And if you push the Bastiat-is-passe hipsterism enough, I'm sure people will be convinced you've assimilated his insights. But when you go about talking how "nice" action A is for person B, without comparing to how not-nice it is for person C, your (failure of) analysis proves more than all the squealing in the world about how you do too! "get" Bastiat.
Also:
Next you're going to be telling me volunteers are not nice for just giving away their hours to people. The nerve!
That would be true, but you would have to add stronger assumptions there that aren't necessary here or are satisfied (e.g. pricing of externalities that the volunteers are probably trying to fight, local efficiency at finding comparative advantage, etc).
(And drop the n-word, please.)
Eh, I think I've been reading your blog long enough to be pretty darn certain that you don't understand Bastiat...
Delete"Apparently, then, the legislators and the organizers have received from Heaven an intelligence and virtue that place them beyond and above mankind; if so, let them show their titles to this superiority." - Bastiat
Yet you think that Obama's stimulus wasn't big enough!
"If the socialists mean that under extraordinary circumstances, for urgent cases, the state should set aside some resources to assist certain unfortunate people, to help them adjust to changing conditions, we will, of course, agree. This is done now; we desire that it be done better. There is, however, a point on this road that must not be passed; it is the point where governmental foresight would step in to replace individual foresight and thus destroy it." - Bastiat
Yet you don't think it's important for people with individual foresight to be rewarded for their individual foresight.
It might help to read Bastiat a "few" more times.
What are you talking about, Silas. How am I being mean to someone that doesn't get my gift because I've given a gift to someone else?
DeleteXerographica -
Not sure what you're talking about. I'm on board with both of those Bastiat quotes. I think you might not understand my views as well as you think.
Kuehn, here's what you wrote in this post...Why you should vote for Obama...
Delete"More stimulus would have been ideal, and Obama could have worked harder but I don't know if he could do anymore on that."
Here's what you wrote in defense of the current system...
"You don't see the government funding indisputably private goods here, and you don't see a complete lack of rhyme or reason to how things are allocated."
How can you be on board with both of Bastiat's quotes? Here's a simple question...can government planers know the optimal level of funding for defense, the courts and the police?
How am I being mean to someone that doesn't get my gift because I've given a gift to someone else?
DeleteBecause you're ostensibly trying to do the most good with your gift and yet knowingly give it in a way that doesn't do so.
Silas, say you have one bottle of water to sell and 2 customer show up. One is a rich guy who is prepared to pay $1000 to buy water to clean his hands. The other is a person who will die without the water but only has $10.
DeleteWho do you sell it to ?
Silas would avoid the moral dilemma by suggesting to the guy with $10 go to his local bank and get a loan for $990.
Delete@rob: That would fall into the list of assumptions I mentioned in response to Daniel_Kuehn's question about volunteers. But that's not the kind of situation we have going on here, so the point is moot. It's not "desperate gas user vs. rich dude that likes to waste gas"; rather, it's "desperate gas user/hoarder vs. much more desperate gas user", and I would think "niceness" would entail ensuring availability for the latter, or at least weighing the niceness of that against giving a freebie to Mr. Show-Up-First.
DeleteYou know, the unseen and all that gets in Daniel_Kuehn's craw.
Wait, whats to stop rich people from hoarding/wasting gas in this scenario? If gas prices tripled to $15 a gallon the cost/benefit calculation is still a lot easier for a rich person who likes to waste/hoard gas than much more desperate gas user who needs his car to get to his job at Burger King. But hey, the solution to this problem is to give the guy who works at burger king the freedom to trade his kidney for gas.
DeleteAlso, it is not hard to make an argument that the "desperateness" of any give gas consumer is evident in how much energy they put into showing up in line first and/or waiting in line.
Prices are still a rationing device. The legitimacy of prices as a rationing device rests on its efficiency and the idea that ATP=WTP. If either of those does not hold price rationing is not the clearly superior mechanism.
I think its also important to point out that those of us arguing that price gouging "isn't nice" acknowledge that prices are fine most of the time even if most of the time. Even if most of the time the pure supply and demand model is a special case. We are just arguing that even in this instance that is it not obvious that the price mechanism is the right way to solve this problem. Which is something you market fundamentalists can't concede becuase you are arguing a purely theological belief in micro 101 and are reduced to arguing pure abstractions like perfectly functioning and instantaneous credit markets during a natural disaster.
@Andrew_Bossie: Did you want to point to an actual example of a rich person deliberately wasting gas "just because he could" under a case of price gouging, or did you just want to do your boilerplate "market fundamentalist" rant, and ignore how I've been arguing that in your very own terms, this is case where markets work, and where the niceness comes at the expense of meanness elsewhere?
DeleteActually, I think I know the answer.
Right after you point me to an actual example of a gas hoarder.
DeleteThis entire discussion has been nothing but hypotheticals and I'm not sure why the buck stops at my post.
Why do I need hoarders for my point to work? It's not based on them, but on gas stations that empty in five minutes and so end up screwing over those that really needed it and would have paid twice as much despite not being ultra-rich, and Daniel_Kuehn's bizarre insistence that this must be "nice", along with his insistence that anyone comparing to the unseen costs must be a Bastiat fanatic.
Delete(Seriously, Daniel_Kuehn: to not even *think* of the losers of non-gouging? And then to browbeat those who bring it up? Gives me *real* faith in your economics prowess.)
In any case, are you really serious that people don't top up their tanks when a hurricane is coming, irrespective of expected use?
I've been ignoring your comments, Silas, for the same reason I always end up eventually needing to ignore your comments. But let's keep one thing straight on this last one.
Deletere: "Seriously, Daniel_Kuehn: to not even *think* of the losers of non-gouging? And then to browbeat those who bring it up?"
If the government tells someone they can't freely make a trade at a voluntary price, there are going to be losers to that. If the price was voluntary someone was willing to pay for it and someone will lose out if they are not allowed to pay something they are willing to pay. That's (one of many reasons) why I oppose anti-gouging laws.
But if I don't want to trade something at a gouging price, somebody that would have paid a higher price can't say they "lost" anything. You can't lose something you never had Silas. Your alleged "losers" never had a voluntary agreement with me for anything. They didn't lose anything any more than you are a loser because I've chosen to keep my earnings and not give them away to you.
Think about it this way - there are going to be suppliers out there with lower reservation prices than some of the consumers who are priced out of a normally functioning market. Does that make sense what I'm referring to? There are going to be suppliers to the left of equilibrium who have reservation prices lower than many consumers to the right of equilibrium. Do you think those consumers are "losers" simply because those suppliers supplied to someone else even when a mutually beneficial exchange could have occurred?
If your answer to that is "yes" then you certainly have no business promoting gouging.
Daniel_Kuehn: the fact that someone never had an agreement with you does not mean they were not "a loser" in your decision to favor earlier-comers over more-desperates (with the same income), nor that you haven't failed to do the most good (your purported intention).
DeleteBut if you want to keep blurring the issues of rights, pre-agreements, niceness, and utility maximization by moving the goalposts to whatever issue you think you're not losing on, go right ahead -- it's your blog and all.
It still doesn't give me confidence in the clarity of your thinking.
The fact remains: you cannot argue for the "niceness" of one action without thinking about to whom it is not-nice. Which you forgot to do, and then refused to do even when confronted, by changing topics.
You are changing the goal posts now.
ReplyDeleteWhy are we talking about what people did beforehand? There was no gas shortage beforehand.
BTW: show me a gas station that has emptied out in five minutes!
Anyway, you are welcome to the last word here. I'm not sure this was ever an interesting discussion, but it certainly isn't now.