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Thinking about the ethics and economics of ‘price gouging’

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A reporter posted a picture on Twitter yesterday that showed a Best Buy in Houston charging $42 for a case of Dasani water. The picture also showed a case of Smartwater for $29, with a sign noting there was a “limited supply.”

Not surprisingly, the outrage on social media prodded Best Buy to quickly respond by claiming it was a mistake.

“As a company we are focused on helping, not hurting affected people,” the company said in a statement. “We’re sorry, and it won’t happen again.”

Best Buy, Inc. is a multinational company and the largest specialty retailer in the U.S. consumer electronics retail industry. They likely have many people on their staff who are savvy enough about economics to explain why the increased price on water was helping, not hurting affected people. Nevertheless, the company felt obligated to apologize and promise never to engage emergency surge pricing (i.e., when a seller responds to the excess demand during an emergency situation by increasing the price in order         to again equalize market demand with available market supply).

I sympathize with Best Buy. While the economics of “price gouging” is rather simple and straightforward, the ethics of emergency surge pricing is counterintuitive and complicated. It’s often difficult for people who are both morally and economically minded to decide what to think about such situations.

I wish I could offer a perspective on the issue that was not only based on sound economics and Christian ethics but also broadly compelling to my fellow beliefs. If such a view exists, though, I certainly don’t know what it is—much less how to develop it into a convincing argument.

Instead, I’ll offer five beliefs I have related to emergency surge pricing during natural disasters and how I attempt to satisfactorily resolve the inherent contradictions and conflicts between them. The five beliefs are:

  1. The morality of price gouging is context-specific. That is to say, price gouging may be morally licit in some situations and immoral in others.
  1. Emergency surge pricing benefits the community in aggregate even though it can cause harm at the level of the individual.
  1. Anti-price gouging laws are more harmful than helpful because they create shortages on the most urgently needed goods and services during emergencies.
  1. Because emergency surge pricing offends people’s sense of justice and fairness, defending such policies can make society less likely to support other free market initiatives that increase human flourishing.
  1. Emergency surge pricing has the most detrimental impact on poor individuals and families who are already the most vulnerable during such crisis situations. We have a moral obligation to resolve this problem.

  1. The morality of price gouging is context-specific. That is to say, price gouging may be morally licit in some situations and immoral in others.

Increasing the price of goods or services during an emergency is not inherently immoral since the price increase can lead to a more fair and equitable distribution of scarce resources. To know whether it is moral, however, requires understanding the specific context of a particular exchange (e.g., you have water to sell and I want to buy it) and how we should prioritize other moral duties.

As a Christian, I must always be aware that the moral legitimacy of economic decisions is complex and context-specific. While a free market is often the best way to facilitate virtuous exchanges, not all exchanges in a free market are virtuous.

  1. Emergency surge pricing benefits the community in aggregate even though it can cause harm at the level of the individual.

On an emotional level, I’d prefer to oppose emergency surge pricing. “Price gouging” just feels unfair, and intuitively seems like a violation of my Christian duty to love my neighbor. I can also imagine how I would feel if I were caught in a situation where the price of goods and services during an emergency exceed my ability to pay. Even if I had the money I would likely be outraged at the “unfairness” of what would appear to be profiting from my misery.

Yet if I set aside my emotional reaction I can clearly see the rational justifications for emergency surge pricing and how it can lead to more just distribution of goods and services. Rather than restate the economic case for “price gouging” I’ll simply suggest watching the video below or reading this defense by Donald J. Boudreaux.

  1. Anti-price gouging laws are more harmful than helpful because they create shortages on the most urgently needed goods and services during emergencies.

About 70 percent of U.S. states (including Texas) have some form of price-gouging laws. While they may useful in an indirect manner (more on this in a moment), they are likely to cause more harm than good because they create shortages of goods and services. As Michael Giberson explains in the journal Regulation,

Economists and policy analysts opposed to price gouging laws have relied on the simple logic of price controls: if you cap price increases during an emergency, you discourage conservation of needed goods at exactly the time they are in high demand. Simultaneously, price caps discourage extraordinary supply efforts that would help bring goods in high demand into the affected area. In a classic case of unintended consequences, the law harms the very people whom lawmakers intend to help. The logic of supply and demand, so clear to economists, has had little effect on price gouging policies.

Giberson also highlights a 2007 paper in the Journal of Competition Law and Economics that examined the effects of price gouging laws and concluded a national law would have increased total economic losses during Hurricanes Katrina and Rita by nearly $2 billion, mostly from interference with incentives to bring goods and services to areas where they are most needed. In addition, they found that a national price gouging law would have left more of the economic burden of the storms on the states most directly hit, Louisiana and Mississippi, while moderating the economic consequences for the rest of the nation.

  1. Because emergency surge pricing offends people’s sense of justice and fairness, defending such policies can make society less likely to support other free market initiatives that increase human flourishing.

The strongest defense I can make in favor of price gouging laws is a pragmatic one based on a reality that we might never be able to change: the majority of Americans will never accept the economic rational for why emergency surge price benefits communities. Even when presented with convincing arguments for why price-gouging laws have a detrimental effect—and may lead to greater harm and suffering—most Americans will allow emotion to overwhelm economic reasoning.

In other words, if you can’t beat ‘em, join ‘em.

But why should we join them? Because if people despise emergency surge pricing and associate it with the free market, they are more likely to believe that the free market leads to similar harms. To prevent the public from opposing other free market policies that promote the general welfare, we may need to avoid defending emergency surge pricing.

The problem with this concession is that relies on a consequentialist, Machiavellian justification. In essence we would be saying, “Yes, people are harmed by anti-price gouging laws. But that’s a sacrifice we have to make to prevent people from supporting other types of harmful anti-free market policies.”

That’s not an approach I feel comfortable with, which is why I believe we need to find a suitable compromise for how to replace anti-gouging laws.

  1. Emergency surge pricing has the most detrimental impact on poor individuals and families who are already the most vulnerable during such crisis situations. We have a moral obligation to resolve this problem.

In general, emergency surge pricing alleviates hoarding and provides incentives to increase supply of goods and services in areas struck by disaster. This benefits everyone by ensuring that supplies are where they are most needed. However, we are left with the problem of how to make these resources available to poor individuals and families, many of whom may barely be able to afford normal prices.

While I don’t have a solution that is fully fleshed out, I have a proposal for how we might consider alleviating the problem: surge-pricing vouchers.

Prior to a natural disaster, individuals and families could apply to receive government-provided vouchers that would cover the cost difference between the normal price and the emergency surge price for a specific basket of essential goods and services.

For example, let’s imagine that a case of water normally sells for $10 but because of surge pricing the cost has risen to $25. A low-income buyer would pay the normal cost of the product ($10) and give the vender a voucher for the remainder ($15). To recoup the difference, the vendor would send the voucher to the government for reimbursement. (In lieu of anti-gouging laws the vendor would be required to accept vouchers during declared emergencies.)

There are other ways the vouchers could be designed to benefit the low-income individual. The vouchers could, for instance, cover the entire cost of a product and the government could recoup the normal cost at a later time. They could also be transferrable, allowing the low-income individual to sell or trade their voucher for something they’d prefer to have (such as cash).

No doubt there are many legitimate objections to this proposal. Designing and implementing the plan would be difficult and it would suffer from the same problems caused by any other government intervention, including increasing unforeseen and unfortunate consequences.

But even with these flaws a voucher system (or something similar) might be a better option than the laws we have in place.

Economic Thinking for the Theologically Minded

Economic Thinking for the Theologically Minded

Economic Thinking for the Theologically Minded provides an introduction to what has been called "the economic way of thinking." This involves explaining some of the critical concepts and foundational assumptions employed in economics.

Joe Carter Joe Carter is a Senior Editor at the Acton Institute. Joe also serves as an editor at the The Gospel Coalition, a communications specialist for the Ethics and Religious Liberty Commission of the Southern Baptist Convention, and as an adjunct professor of journalism at Patrick Henry College. He is the editor of the NIV Lifehacks Bible and co-author of How to Argue like Jesus: Learning Persuasion from History's Greatest Communicator (Crossway).

Comments

  • Gary Stewart

    You might want to rethink the idea of the vouchers. All it would accomplish is enriching the people who sell bottled water, even the ones who never intended to price gouge. And what about the gouging of the taxpayers? The new price of water in, and for 50 miles around that affected city, would be $25, for years. On the other hand if price gouging is allowed, within just a few days bottled water would be in abundant and affordable supply. BTW, go to any big flea market on a summer weekend, anywhere in the county, and you will see bunches of people selling cold water to grateful customers for $24 a case, one bottle at a time.

    • Joe Carter

      ***he new price of water in, and for 50 miles around that affected city, would be $25, for years. ****

      There’d obviously have to be a time limit (say, a few weeks) otherwise the surge pricing wouldn’t have the intended effect of signaling that more supply was needed so that the price could return to normal.

  • The theologians of the University of Salamanca addressed price “gouging” in the 16th century. They saw nothing wrong with it.They insisted on the just price being the price at which two people agreed to exchange goods as long as there was no coercion. Even if the seller knew that more supplies were on the way, the seller was under no obligation to reduce his prices.

    Anger at price gouging is evidence of envy because people are happy with shortages or no products as long as no one makes any money from the shortage. Like the Russians say, we would rather starve than have our neighbor do better than us.

  • Philosophical Actuary

    For the Catholics in the room and those who see the wisdom in Rerum Novarum:

    “Doubtless, before deciding whether wages [are] fair, many things have to be considered; but wealthy owners and all masters of labor should be mindful of this – that to exercise pressure upon the indigent and the destitute for the sake of gain, and to gather one’s profit out of the need of another, is condemned by all laws, human and divine.” (Rerum Novarum 20) http://w2.vatican.va/content/leo-xiii/en/encyclicals/documents/hf_l-xiii_enc_15051891_rerum-novarum.html

    Though Leo XIII is speaking within the context of discussing just wages, he demonstrates the general principle upon which it is based. This principle is applicable to price gouging in so far as it attempts “to exercise pressure upon the indigent and the destitute for the sake of gain.”