Monday, August 23, 2004

Ah, how economic theory clouds the minds of men. In the wake of Hurricane Charlie, Mark Kleiman explores a mystery:

Why is "price gouging" the name of a problem?

Florida authorities report a wave of price gouging in the wake of Hurricane Charley, and promise to enforce Florida's anti-gouging laws.

Some of this is fairly straightfoward enforcement against bait-and-switch and false advertising, and raises no conceptual problems.

But from the viewpoint of orthodox economic analysis it's hard to explain exactly why it's wrong, in the wake of a disaster, for someone who has a limited amount of ice or gasoline or tarpaper to sell, and a large number of customers for it, to charge whatever the market will bear.

The textbook analysis has a lot to be said for it: not only does the higher price encourage people to use as little as they can of the temporarily scarce good and encourage potential suppiers to spend what they need to spend in order to rush new supplies to the market, the prospect of higher prices encourages stockpiling in advance of potential disasters by merchants and consumers alike. (Since no one can cause a hurricane, there's no reason to fear perverse incentives.)

But the textbook analysis ignores something that people on the ground find it impossible to ignore: the market, operating freely in this kind of atmosphere, allocates scarce goods not by need, but rather by ability pay. The two generally have nothing to do with each other.


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