In Praise of Post-Sandy Price-Gouging

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By Tobin Harshaw

As I rode a taxi home from work last night, my driver asked if I minded going a fair distance out of our way to return an iPhone to some tourists who had left it in his cab days before. Delighted to play the role of Hurricane Sandy Guardian Angel, I agreed. Our reward? He got a peck on the cheek from some lovely Algerian teenagers, and then we ran out of gas at the Lincoln Tunnel entrance, a few blocks from my home but a borough away from his.

During the drive, he had explained to me that he was almost empty because gas was nearly impossible to find in Manhattan and lines in New Jersey were eternal. As I hoofed it home, I wondered if there was any cure for this post-disaster market failure. Well, a quick Google search provided a resounding answer: Make price-gouging legal.

Now the idea that gas stations and others should jack up prices in Sandy's aftermath is not just counterintuitive, it is strongly at odds with efforts by New Jersey Governor Chris Christie, New York Governor Andrew Cuomo and other officials to crack down on retailers looking to make increased profits off the storm.

Yet the arguments in favor of extortion are pretty strong. Here's Matthew Yglesias at Slate:

The failure to allow prices to adjust doesn't magically eliminate the supply side problems, it just means that the gasoline is misollacated and lots of people need to waste time in line. You can also see that the combination of shortage and underpricing seems to be leading people to overconsume when they do get to the front of the line.

Last but by no means least, the lack of price gouging is harming things on the supply side. If it were possible to earn windfall profits by transporting gasoline into the affected areas, then human ingenuity would be finding ways to do it. But if you restrict retailers to earning merely ordinary profits, then people won't take extraordinary measure to increase supply.

From across the political spectrum, the Wall Street Journal's Holman Jenkins agrees:

Millions who live in the Northeast and endured Irene and last October's snowmageddon raced to their local hardware store for a portable generator. The store owner cares about his reputation with customers, so he didn't boost the price by 50% to curb demand—with the result that some people walked out with two or three because, what the heck, better safe than sorry, and anyway an extra generator can be unloaded on Craigslist for twice the retail price …

What if the price of generators were allowed to reflect supply and demand in a weather emergency? Standard rhetoric might have you believe only the rich would buy generators. Really? Generators would sort themselves according to the socioeconomic status of the would-be customers? Or would they go home with those who value them most, while other shoppers would think twice about whether they really need one?

CNBC's John Carney says that anti-price-gouging laws create a perverse market that rewards those who arrive first over those most in need: "People hoard goods. Store shelves are emptied. And you have to wonder, why is a first to the register race a fairer system than the alternative of market prices? Speed seems a poor proxy for justice."

He continues:

Allowing prices to rise at times of extreme demand discourages overconsumption. People consider their purchases more carefully. Instead of buying a dozen batteries (or bottles of water or gallons of gas), perhaps they buy half that. The result is that goods under extreme demand are available to more customers. The market process actually results in a more equitable distribution than the anti-gouging laws.

Once we understand this, it’s easy to see that merchants aren’t really profiting from disaster. They are profiting from managing their prices, which has the socially beneficial effect of broadening distribution and discouraging hoarding. In short, they are being justly rewarded for performing an important public service.

One objection is that a system of free-floating, legal gouging would allow the wealthy to buy everything and leave the poor out altogether. But this concern is overrated. For the most part, price hikes during disasters do not actually put necessary goods and services out of reach of even the poorest people. They just put the budgets of the poor under additional strain. This is a problem better resolved through transfer payments to alleviate the household budgetary effects of the prices after the fact, rather than trying to control the price in the first place.

I admit to some ambivalence here. I've been struck by the come-together attitude in my still-powerless Manhattan neighborhood. For example, the owners of my corner deli not only kept prices stable, they also ran a bunch of extension cords off their generators so customers could recharge phones and laptops while they sipped coffee. I worry that $10 packs of AA batteries and auctions over Bud Light six-packs could put a real crimp in the camaraderie.

Then again, in a city that desperately needs transportation to get back on its feet, my forlorn taxi driver's empty tank seems a much higher priority.

(Tobin Harshaw writes editorials on national security for Bloomberg View. Follow him on Twitter.)

Read more breaking commentary from Bloomberg View columnists and editors at the Ticker.


-0- Nov/01/2012 16:41 GMT