In Favor of Price Gouging?

DESCRIPTIONAP Photo/Michael Dwyer Water surges from the ground at the site of the water main break in Weston, Mass.

A big water-main break in Boston sends everyone scurrying to stores to buy bottled water. Inevitably, stores sell out of water quickly; and, just as inevitably perhaps, there’s talk of price gouging — accusations that some stores jacked up the price of a bottle of water to unconscionable levels. The Massachusetts attorney general vows to investigate.

Assume for a moment that every store tripled the price of water as soon the shortage became evident. How outraged would you be? How outraged should you be? Or, perversely, do you think stores should have charged even more, perhaps 10 times the normal amount for a bottle of water?

How you answer these questions probably depends on when you got to the store (and/or whether you have studied economics). If you arrived in time to buy as much water as you wanted, you were probably a bit ticked off to pay triple, but still grateful you got your water. If the bottled water was all gone by the time you arrived, you probably wish the store had charged 10 times the normal amount. That high price would have acted as a brake against all the unnecessary hoarding that happened before you got to the store, and there would have been some water left for you.

There’s a very strong passage on this topic in Russ Roberts‘s economics novel The Price of Everything, more on which here.

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  1. Brett says:

    I think stores should be able to charge whatever they want. If you don’t want to be screwed in an emergency, put together some food/water storage.

    I live in a tiny apartment in NJ where space is a premium, but I’ve got 3+ days of water for me and my family so that in this type of situation the price of water at the store won’t make a bit of difference to me.

    If people aren’t willing to prepare, they must be willing to face the consequences.

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  2. tzimiskes says:

    Is it really that hard to drive (or take a bus/train) a ways out that price gouging could work at 10 times the normal price?

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  3. John D says:

    Price gouging is the act of pricing something unreasonably high in order to take advantage of the desperation of one’s buyers. But not all selling to desperate buyers is gouging — if the price is set to reflect the comparative scarcity of the item vs. demand, rather than the desperation of the buyer, it’s not really gouging.

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  4. Jared says:

    Jack that price up even higher! It’ll encourage the supply to meet up with demand. Incentives, people. Incentives. You have to incentivize the suppliers.

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  5. Gues says:

    I think if you complain about price gouging, you have to complain about hoarding as well. If you’re going to restrict price, you should restrict supply (a case of two wrongs making a right).

    It’s cute to sit in a air conditioned office and muse about what the most Pareto efficient solution would be, but as someone who’s lived through numerous hurricanes I can assure you – when the going gets tough, it’s worth it to sacrifice a little bit of economic efficiency for a more egalitarian distribution of necessaries. Otherwise someone will notice that his neighbor has 20 gallons of water, he has none, and decide that the most efficient solution for his problem is to beat his neighbor up and take his water.

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  6. RandFan says:

    To Levitt and Dubner,

    I love you guys. Keep up the great work. Your healthy “thought snacks” nourish an otherwise morose public, obese on the “junk food” of a conventional media all too eager to feed the insatiable appetites of conventional thinkers.

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  7. Kit says:

    People simply should have stayed home and filtered and boiled water instead of spending hours and costly gas to needlessly horde. I hope some think to recycle those plastic bottles. What a waste.

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  8. mike says:

    The AG vows, in words reported by the Boston Globe, “If we discover that businesses are engaging in price gouging, we will take appropriate legal action.” The Governor also said the state would be “responding to consumer complaints of price gouging.”

    What is the “appropriate legal action”? The state’s price gouging law only covers petroleum-related businesses selling petroleum products; no price gouging or emergency price control laws in Massachusetts appear to apply to bottled water.

    As I stated in blogging about the topic yesterday, “my conclusion is that the Governor and the Attorney General are intentionally deceiving retailers about the state’s price gouging law as a kind of underhanded moral suasion intended to deter price increases on bottled water.”

    (See Knowledge Problem blog: “Is price gouging on bottled water against the law in Massachusetts?“)

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