Hanson, Hurricanes, and Price Gouging

Describing our primitive ancestors, Robin Hanson writes,

when the group was stressed and threatened by dominators, outsiders, or famine, the collective view mattered less, and people reverted to more general Machiavellian social strategies. Then it mattered more who had what physical resources and strength, and what personal allies. People leaned toward projecting toughness instead of empathy. And they demanded stronger signals of loyalty, such as conformity, and were more willing to suspect people of disloyalty. Subgroups and non-conformity became more suspect, including subgroups that consistently argued together for unpopular positions.

I suppose that people see charging a high price for something in the wake of a hurricane as disloyal. The situation calls for group solidarity, and instead here is this merchant looking out for himself.

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9 Responses to Hanson, Hurricanes, and Price Gouging

  1. asdf says:

    I think we can divide price gouging into a few categories.

    1) The kind that can signal more supply to be brought in. If I can make $8/gallon for gas in a hurricane zone, I have more incentive to go to extreme lengths to bring in more gas. This might improve the situation if the signal increases supply. The question is if supply really can respond to the signal in a timeframe that matters.

    2) Supply is constrained and the good is non-essential. In this case the price signal doesn’t really alleviate the supply situation, but since its non-essential people are at least begrudgingly OK with limited supply going to the well off.

    3) Supply is constrained and the good is essential. In this case the price signal does nothing, people desperately need the item, and they don’t really respect rich peoples claims to be at the front of the line. This might actually be the situation in a lot of these natural disasters. If you sell water for $10 a bottle for a couple of days when its impossible to bring in more supply it just seems like your making money off peoples desperate situation.

    Put another more extreme way, lets say your trying to escape Casablanca. There is a constrained supply of Exit Visas. The price could get bid to infinity and no more will be produced. If someone tries to make a fortune pitting people against each other to bid higher and higher prices to choose who lives and who dies we don’t consider the seller an admirable capitalist.

    • Ricardo says:

      Sure we do: those admirable capitalists are communicating the value of the exit visas to everyone else. To do otherwise is to lie.

    • BC says:

      No good is essential *at the margin*. If the marginal bottle of water is truly essential, then even the poor will pay $10/bottle for it. Poor people pay more than $10 for many things, rent for example. If the price of water is $2/bottle, then people will try to consume until the value of that water is $2, which includes “non-essential” consumption, like hoarding.

      If you sell water at non-emergency prices, then people will (rationally) hoard it because it makes sense to ensure that one has enough. One might not be able to get more later if one runs out. Of course, if everyone else is hoarding, then a shortage is even more likely, so one should rationally hoard oneself, even if one wasn’t inclined to do so were other people not hoarding.

      When water is sold for $10/bottle, then people will be less inclined to hoard, which also makes other people less inclined to hoard. Also, when water prices are *expected* to rise during emergencies, then people will be more inclined to buy and store water ahead of time, which will alleviate shortages when emergencies actually happen.

      Some people used to worry about peak oil, which never happened because oil prices are flexible. During the hurricanes, prices were not flexible and we had shortages. Are there *any* historical examples of shortages with flexible prices?

      • BC says:

        By the way, people storing water ahead of time in anticipation of high prices is an example of supply not being as constrained as one might think. Even if water cannot be brought into Florida during or immediately after a storm, it could have been brought in weeks or months ahead of time and stored in people’s houses or businesses’ warehouses.

        Expectations of high prices also incent businesses to plan and innovate *ahead of time* ways to distribute water during emergencies. In other words, there is “unseen” supply that has been destroyed by price controls.

  2. Effem says:

    I think people inherently distrust the link between money and utility. If i’m rich I might spend 0.001% of my net worth to get a few extra bottles of water. If i’m poor I might be willing to spend 100% of my net worth for that same water but I will be outbid. I think society would prefer to allocate goods based on utility but lacks a mechanism to do so.

    • Ricardo says:

      But it might be much, much, much better for society for the rich person to get the water. To a first approximation, “rich” means “adds a lot of value, relative to others.”

  3. collin says:

    In terms of hurricane price gouging, this is one area where libertarian economist seem way out in left field.

    1) Libertarians love shaming the poors for better society behavior so why are not store owners the same thing?

    2) Store owners need repeat business and people have lots of choices of where to buy water tomorrow next month. Price gouging earns extra $1000 today but lose $100 for the next 12 months

    3) I find it interesting that stores owners are not offering higher wages to workers and can threaten to fire.

    4) Most businesses don’t sell themselves as we only care maximing profits for ourselves. Koch Brothers website has loads of information on their environmental awards and happy employers but not much about how rich the brothers are.

  4. RohanV says:

    The situation calls for group solidarity, and instead here is this merchant looking out for himself.

    The merchant also decreases group solidarity in the customers, pitting them against each other. It’s somewhat similar to the bank run scene in It’s a Wonderful Life, where George rations out the available cash.

    I wonder if allowing “price-gouging” would increase thefts and looting. After all, if you can’t afford the item, and you think it’s essential, you’re going to steal it. It’s generally not a good idea to put people in situations where they feel they have to break the law.

  5. Weir says:

    Reaching your 65th birthday is some kind of unforeseen emergency that needs to be insured against and compensated for. Rent control is justified by another permanent emergency. You need a pair of glasses. The British government will rescue you from this emergency of having to buy glasses. The Australian government pays you for raising your child, because raising your child is a hurricane. The minimum wage is justified by the permanent emergency of something or other. The list is long.

    Our primitive rulers treat the entire economy as an emergency. There are only exceptions. Everything’s an exception to the laws of supply and demand. Cradle to grave, it’s one hurricane after another.

    In reality, prices are signals. Not to our primitive betters. In reality, there is a crisis. But they created it. Politicians don’t allow the signals to get through. They’re jamming the airwaves with their slogans about a mythical untrammelled market or what they call American conditions or les Anglo Saxons and these fairy-tale ogres of ruthless capitalism, red in tooth and claw. In reality, the market doesn’t exist. It was never allowed to form. They won’t allow it to form.

    Our primitive Harvard graduates and Oxford scholars create these artificically high prices for property, and these artificially high prices for work, and then there’s an unemployment crisis in France, and a housing crisis in Canada. Every first-year in political science reads this one article about the tragedy of the commons, and their solution, when they get jobs in government, is to make it worse. They think everything’s a lifeboat, and rationing solves everything.

    They congratulate themselves about how they’re really open to experience, and they put a great emphasis on the food they eat, and there’s a great deal of narrative and verbiage connected to the food they eat, because their food is brought out to them with a story behind it, and its purity comes guaranteed. When they order coffee, they believe in maximum diversity. But they believe in censoring people. They will cleanse all workplaces of people who aren’t pod people. Invasion Of The Body Snatchers is their ideal, and 1984 their manual. Global warming is this all-purpose excuse for everything. They see themselves living through this permanent siege, and their zoning laws will keep the barbarian hordes from breaching the gates, and licensing laws will keep the poor in their place. Really expensive credentials will insulate their kids from the crisis they’ve created and bequeathed to their kids.

    And then they watch Stephen Colbert and Seth Myers and John Oliver all tell the same joke over and over again, because they’re so open to experience.

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