Not only does it actually pass the sniff test, but allowing price gouging creates a market incentive for people to hoard supplies until they think prices are at their highest, then try to sell their stock for maximum price: https://www.timesfreepress.com/news/local/story/2020/mar/14/...
Hoarding artificially drives up the prices and keeps emergency supplies out of the hands of those who need it most.
When you disallow price gouging, you remove one of the worst incentives for hoarding of critical supplies. You still get some people who think anti-price-gouging laws don't apply to them, or who have never heard of such laws, but that doesn't mean allowing price gouging would improve the situation by any means. On the contrary, more people would hoard for longer, because they see the available supply constricting even faster (due to more people hoarding), driving prices even higher, making their own hoard of supplies seem even more likely to be their ticket to wealth, and if it's perfectly legal, nothing is going to rain on their early retirement.
In the above case of someone hoarding 17,700 bottles of hand sanitizer, they ended up donating the entire stock to avoid being fined for price gouging, which seems like an example of the system working correctly to disincentivize hoarding during an emergency: https://www.nytimes.com/2020/04/22/us/hand-sanitizer-matt-co...
That man bought a good in a place where there was high supply and low demand. He wanted to sell it in a place that had low supply and high demand. There were people who were desperate for hand sanitizer in coastal urban areas. They were willing to pay this man for it. Had he been left alone, at the end of the day everyone would have been better off. The people who sold him the hand sanitizer are better off (otherwise why are they selling hand sanitizer?). The people who most wanted hand sanitizer would have gotten it, and this man would have been compensated for his foresight and scrappiness. All voluntary transactions with no coercion.
Instead the local government sent men with guns to his home and "encouraged" him to "donate" his hand sanitizer. Then it sat in a church until it was eventually distributed to local firemen, policemen, and medics... in a county that (at the time) had a total of 1 confirmed case of coronavirus. Now he's poorer and potentially facing jail time. And thousands of people in places like New York and New Jersey went without hand sanitizer and were more likely to spread the disease. I'm guessing at least a few people died because of this.
My go-to story of price-gouging laws causing more problems is Michael Munger's They Clapped: Can Price-Gouging Laws Prohibit Scarcity?[1], which details the effect these laws had after Hurricane Fran struck Raleigh, NC. It's yet another instance of a well-intentioned law that makes people worse-off.
I completely disagree. Your comments on the example I referenced don’t match reality or what was in the article at all. Read the first paragraph of the first article:
> On March 1, the day after the first coronavirus death in the United States, brothers Matt and Noah Colvin set out in a silver SUV to pick up some hand sanitizer. Driving around Chattanooga, Tennessee, they hit a Dollar Tree, then a Walmart, a Staples and a Home Depot. At each store, they cleaned out the shelves.
These people did not buy hand sanitizer in an area with high supply with an intention of getting it to people in need. They recognized that the value of hand sanitizer was about to go up, so they acted faster than everyone else to scoop up as much stock as they could, with the intention of charging people much more than they paid for it.
This had nothing to do with supply chain inefficiency, where supply is sometimes available in the wrong geographic location. They acted before the pandemic was a major national issue, in anticipation that it would become such a thing, in order that they would stand to profit from it without actually bringing any additional value to anyone.
That's the great thing about commerce: It makes selfish greedy people beneficial to society. It doesn't matter what this guy's intent was. The end result would have been to move a scarce resource from the shelves of some stores in Tennessee to where it was desperately needed. Instead, the resource sat in a church in Tennessee while thousands of people in New York and New Jersey were getting infected.
Here's a hypothetical: Imagine that instead of those stores having hand sanitizer for him to buy, they'd taken it off their shelves and sold it online at market prices (much higher than the price a few weeks before). The end effect would be the same, except without him as a middle-man. Would you prefer that the police go to those stores and "encourage" them to "donate" the supplies? In this hypothetical there's no middle-man, making it purely a distribution issue. So if you still have qualms about this hypothetical, then it's the price mechanism that bothers you and not the middle-men.
People love to hate on middle-men and claim they're not creating any value. But large companies are often too sclerotic to do things like arbitrage a couple products in their inventory for a short time. If not for the middle-men, many more people would have to endure shortages. That's the value they create.
> It makes selfish greedy people beneficial to society. It doesn't matter what this guy's intent was. The end result would have been to move a scarce resource from the shelves of some stores in Tennessee to where it was desperately needed.
You didn’t respond to anything I wrote. Why should I continue this discussion? It wasn’t a supply chain inefficiency issue. Period.
Nationwide chains are perfectly capable of recalling stock from stores that aren’t selling much of something, and moving it to stores that are running low on those supplies.
Local chains are capable of selling those products online, but there’s no need for them to massively mark up the prices to be incentivized to do so. Unless the product is intended to be a loss leader, they already have a profit margin factored in.
Hoarders create an artificial shortage, often in hopes of jacking up the price.
I think the misunderstanding here is that, like most people, you don't like when sellers make huge profits off scarce goods. After all, the seller has more than enough of the good for himself. Why is he also making absurd amounts of money off those who lack it? It feels wrong.
But prices aren't arbitrary. If the price of a good rises, it's because people bought all the ones being sold for lower prices. If people are buying hand sanitizer at $20 per bottle, it's because they can't find any for $19 or $18, let alone for $2 per bottle. The only reason this guy could sell hand sanitizer at such a price was because nobody else was selling it for cheaper.
Now the typical response to this point is that the prices wouldn't be high if we stopped middle-men from buying up all the supply. There's one solution that eliminates middle-men: Stores could raise prices. Then arbitrage wouldn't be possible. Sadly, stores tend not to raise prices because they're worried about violating price-gouging laws. It seems their fears are warranted.
But even in this situation, middle-men don't cause shortages. There aren't massive amounts of hand sanitizer sitting in peoples' garages. These middle-men want to sell their stock and they want to sell it quickly. They know manufacturing will ramp up. They know people will discover or build substitutes. If they wait a couple months to sell, they'll end up losing money. (Especially once you count shipping, storage, and hazardous materials costs. Hand sanitizer is flammable and requires special shipping & insurance.) These middle-men don't destroy any hand sanitizer. They don't hoard it in storage for months. It's the same amount of hand sanitizer, but it goes to desperate people in New York and New Jersey instead of people in a county in Tennessee with only one confirmed infection (at the time).
The main reason for these price spikes and shortages wasn't hoarders or middle-men. It's because demand for hand sanitizer skyrocketed. Every public venue, every workplace, every household wanted it. There simply wasn't enough to go around. This was especially true in New York and New Jersey which were experiencing the brunt of the disease. It was less true in Tennessee where many stores had shelves full of un-utilized supplies. With price caps, people in Tennessee would have bought more bottles of hand sanitizer "just to be sure" and it would likely have been un-utilized or underutilized in their homes. Meanwhile, people in the epicenter of the infection would go without.
Had this man been allowed to sell his goods, and had he sold them at a lower price, he would have run out sooner and they wouldn't have been utilized as efficiently. The lucky people who first found out about it would have bought more "just in case" since, well, supply is scarce. And when someone else showed up an hour later, so desperate that they'd be willing to pay $20/bottle, they'd be out of luck.
Whether or not this guy makes a huge profit is insignificant compared to whether or not supplies get to the people who are most desperate for them. That's what price mechanisms encourage. It's certainly not perfect, but it's a damn sight better than price caps.
> You didn’t respond to anything I wrote. Why should I continue this discussion? It wasn’t a supply chain inefficiency issue. Period.
Yet the only way he could have profited is if there was a shortage somewhere, a.k.a a supply chain inefficiency. Either the supply chain is imbalanced and he gets an opportunity to make money or it’s not. You can’t have it both ways.
> Nationwide chains are perfectly capable of recalling stock from stores that aren’t selling much of something, and moving it to stores that are running low on those supplies.
Not efficiently. Recalling inventory from stores is a very slow process that doesn’t fit their normal model. Also, the inventories don’t come from a grand central warehouse so moving stock from a Walmart in California to a Walmart in New York isn’t really something that the infrastructure can support.
> but there’s no need for them to massively mark up the prices to be incentivized to do so. Unless the product is intended to be a loss leader, they already have a profit margin factored in.
That’s incompetence on the local chains, not that they don’t like more profit. Managers have no incentives to monitor prices and redistribute to higher priced markets so the local chains sell at bad prices.
> Hoarders create an artificial shortage, in hopes of jacking up the price.
No, hoarders do not create shortages. They try to profit during shortages. It’s a critical distinction. Hoarders did not account for the toilet paper shortage, the massive change from commercial to private TP consumption did that.
I recommend reading up on how markets get cornered to gain an understanding of what is required to artificially create a shortage. You’ll quickly realize that it takes an obscene amount of purchasing to meaningfully move a market.
Otherwise we’d have monthly occurrences of people cornering bottled water markets without there being an impending storm.
TLDR; shortages exist because everyone is buying more. People just don’t like price gouging because they are emotional and don’t like paying more when there is a shortage despite this being the mechanism that drives markets around the globe every day (energy, grain, beef, pork, currency, etc).
> Either the supply chain is imbalanced and he gets an opportunity to make money or it’s not. You can’t have it both ways.
But they can, because supply chains can actually run in both directions. GP explicitly mentioned the concept of recalling the stock. And while the supply flowing in reverse isn't moving as efficiently as it normally is, it's still likely much more efficient than a guy fedexing packages to random people across the country.
> That man bought a good in a place where there was high supply and low demand. He wanted to sell it in a place that had low supply and high demand.
That could've been achieved just with a population density map. No reason to use jacked-up prices as a means of determining demand.
More importantly, that could've been done by the supply chain itself, as the stores in high supply/low demand area would be able to return the unneeded sanitizer back to the suppliers, and it would then be redirected to high demand/low supply areas. There's no need for an extra intermediary to make an absurd profit off it.
The supply chain makes no distinction between people who buy hand sanitizer for $2 in Tennessee, and people who buy hand sanitizer for $2 in New Jersey, but are desperate enough to pay $20 for it.
The supply chain has no incentive to redirect resources in the absence of a proper price signal.
It’s much more likely that anti-hoarding laws are passed in order to prosecute people who are planning to price gouge but haven’t been caught in the act.
Would you care to explain why lots of people would hoard when it’s both unprofitable and unnecessary to do so?
Once you have a supply of toilet paper, most people are not going to buy a ten year supply of toilet paper just because it isn’t exorbitantly priced.
People who think they can make a profit absolutely will buy a ten year supply of toilet paper.
> Once you have a supply of toilet paper, most people are
Let me stop you there. The TP shortage was because of normal people buying enough toilet paper to stay at home full time. That’s it.
About half of the TP production goes to giant commercial rolls that go in businesses. The other half for home brands. The commercial factories need to be retooled for smaller rolls and new supply chains need to be setup for commercial to fill the home demand.
With absolutely no hoarding, the home demand would increase at least a 1/4. Then throw in people just buying multiple packs to make it 2 weeks without shopping and you’ve already wiped out the supply.
> People who think they can make a profit absolutely will
Good. I would rather have the option to pay twice the normal price than to wipe my ass with a rock because my government rationed supply ran out.
Finally, anti price gouging behavior encourages poor planning by the population at large. Maybe paying $50 for a flat of water bottles will teach you to fucking think ahead and spend $150 on a critical supplies kit.
> You're basically claiming that supply&demand doesn't work.
Yes, most economists would agree that there are cases when supply and demand do not allocate resources most efficiently. The economics 101 idea your repeating requires that all actors be rational. We know that isn't the case, both in simple cases like this one and in more complex cases, like those that led to the financial crisis.
As soon as you introduce irrational actors, it isn't unreasonable for governments to step in and prevent irrational actors from harming the otherwise reasonable processes.
Price gouging, in fact, encourages this kind of irrational behavior. A rational actor would have realized that we weren't going to run out of toilet paper, and that stocking up on hundreds of rolls wasn't helpful. A rational actor would have continued buying toilet paper at their normal rate, maybe purchasing an extra roll or two.
The people who bought pallets of toilet paper were not acting rationally. And to prevent the issues irrational actors cause, regulations like per-customer limits lead to better allocation of resources.
Society as a whole is better off when everyone has access to toilet paper (or PPE or hand sanitizer). Reducing access only to those who are willing to pay 100x the normal price is not rational. It is a failure of the market.
> The economics 101 idea your repeating requires that all actors be rational.
It does not require people to be rational. I don't know who you took Econ 101 from, but you should ask for your money back.
What it does do is provide incentives for rational behavior.
> Reducing access only to those who are willing to pay 100x the normal price is not rational. It is a failure of the market.
It does not reduce access at all. A sanitizer hoard only has value if it can be sold to people who use it. The hoarder would also know that supply will increase, and he'll have to sell it fast in order to realize a profit. Furthermore, the higher prices encourage only the best use of the sanitizers are made, and encourage more supply.
> What it does do is provide incentives for rational behavior.
Yes, and when/if enough actors do act irrationally, the efficient allocation of resources breaks down.
> A sanitizer hoard only has value if it can be sold to people who use it. The hoarder would also know that supply will increase, and he'll have to sell it fast in order to realize a profit.
Only if individuals are acting rationally. If I am panicking due to a pandemic that I believe hand sanitizer will protect me from, I will be willing to purchase a lot for personal consumption. If enough people do this, it prevents others who have need from getting their own hand sanitizer.
That is not "where they are needed the most". A middle class family who can afford to stay home does not need hand sanitizer more than a frontline worker or a hospital, in fact it's likely better for that family if the frontline worker gets the sanitizer instead. But acting in a panic, and acting irrationally, one can purchase enough hand sanitizer that the price rises enough to prevent those with greater need from accessing it.
> Furthermore, the higher prices encourage only the best use of the sanitizers are made
Except they don't, as we just demonstrated. Hospitals and frontline workers are rationally the best places for a limited supply of hand sanitizer. Increasing the prices does not result in those people getting the hand sanitizer, but instead it results in wealthy individuals getting it.
Hospitals don't have the funding to compete on price with panicked upper class people who believe that hand sanitizer will save their lives. Purchasing quotas are a much better solution, since there is value in as many people as possible having some hand sanitizer for personal use. And if you institute quotas, you don't need to increase price to limit demand, so the only reason to increase price would be to profiteer.
> The hoarder would also know that supply will increase
... eventually. A smart hoarder will just keep their hoard until extra manufacturing is about to start, and dump their hoard then. Because of that, the sanitizer is the least available precisely at the time it's needed the most.
To use an absurdly simplified example, imagine if access to sanitizer reduces effective reproduction number (Re) of the virus, in a way proportional to the amount of people that have this access. Every day the virus spreads, the probability of an individual getting infected grows, so the need to have the sanitizer grows as well.
When that sanitizer is most needed is at the very, very beginning - where it could halt a pandemic in its tracks. But the "maximum need" as perceived by the hoarders will occur only at the point the pandemic is about to burn itself out anyway. Which is precisely when it'll do the least good. A savvy hoarder will sell then, and make a hefty profit. A less savvy hoarder will mistime that point, sell late, and make a smaller profit.
To me, this is the best argument against price gauging.
That said, I think it still doesn't matter because
1) You can substitute hand sanitizer with soap. In a way, hand sanitizer is a luxury item.
2) There is no monopoly on hand sanitizer. There are always less-savvy hoarders who sell their products so manufacturing the pandemic by hoarding doesn't work
3) Preventing the early spread of the virus requires state-level coordination to be successful or else the virus spreads anyway. So for the low reproduction number scenario, let's assume massive state intervention. In that case, containment is very likely and there is no future excessive demand for hand sanitizer, thus even savvy hoarders will sell their stock early on.
I can't imagine a speculator who couldn't easily store couple hundred liters of hand sanitizer in their home if they knew they could make a killing off it. People generally have more space in their homes than they need for survival, so there's slack to make a temporary sacrifice.
Regardless, my point is that sanitizer stored by the speculator waiting for the best price is sanitizer not available for those who would otherwise buy it from the store.
This doesn't pass the sniff test. I can afford to pay $100 per roll of TP, but there's no way I need TP that bad.
You're basically claiming that supply&demand doesn't work.