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.


Brett

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.

tzimiskes

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?

John D

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.

Jared

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.

Gues

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.

RandFan

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.

Kit

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.

mike

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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Imad Qureshi

Prices should reflect current demand. That will stop people from hoarding too and suppliers will simply match the demand.

I paid $85 from downtown Jersey city to LaGuardia. The cab driver didn't used the meter. I could have missed my flight. So he charged me according to my marginal value. But now I realize after reaching my destination I could have refused to pay more than $50 and he couldn't have called the cops because he never turned the meter on. Hopefully next time.

Grant

"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?"

It is my understanding that most of Greater Boston is currently without potable water. That's a pretty large geographic area to meet demand for.

caredwen

Sure, higher prices would discourage some people from purchasing water -- probably the people least able to afford it. I have ethical qualms about the effect of price-gouging on people of lower socioeconomic status. Bottled water available, but only for those who can afford it: how very "let them eat cake."

Rob

If businesses were ethical they would put prices on a curve: one bottle is normal price, the second bottle is more expensive, the third bottle is even more expensive. It is possible to "game" this in various ways of course by coming back later on or having each family member buy one bottle, but the point is that it would solve the problem, despite that.

Nosybear

There were actually several outs that didn't rely on bottled water. Homo economicus would have known there were tablets you could use to kill microorganisms in water available in the camping supplies section but then, he would have instantly done a calculation of the cost of pills, the impact of using them on the taste of the water, the fuel consumed in boiling the water and any other impacts to utility and left the bottled water on the shelf without a complaint. When we have large snows in Denver, despite the experience that the streets will be open in at most three days, people make runs on grocery stores based completely on the forecast. It takes two for gouging to work, a supplier bent on profits at any cost to the relationship with consumers and a consumer desperate enough to pay the price.

Jake

@caredwen

"I have ethical qualms about the effect of price-gouging on people of lower socioeconomic status. Bottled water available, but only for those who can afford it: how very 'let them eat cake.' "

I think most people would feel bad about the situation, but what's your solution? Should the store owner be forced by law to not adjust his prices even when demand skyrockets?

Oh, and please, lose the "lower socioeconomic status." Just say "poor." It saves everyone time, and I promise we won't think less of you.

DG

As a Mass resident, I can report that some (not all) sellers did ration the number of cases of water consumers could buy in order to prevent hoarding. Not as good as allowing prices to adjust, but some sellers did attempt to address this issue.

David B

"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."

This is a textbook distinction without a difference. Let me ask, how do you determine scarcity of item from desperation of buyer? Won't they both occur under the same circumstance: something is needed in much greater quantity than is available? Actually, the problem, it seems, is that scarcity can occur without desperation, but I can't picture desperation occurring without scarcity. If the gold supply were halved, the price would sky-rocket. In your analysis, this would be okay. Not too many people would feel outraged, because no one is desperate for gold. But replace gold with water, and suddenly we're on nebulous territory: the mechanics of the upward price pressure are the same (supply suddenly falls way short of demand and price shoots up to equalize), but because there is desperation involved, someone might call it gouging. People are only ever desperate for something difficult to obtain, i.e. scarce.

The question, then, is can you suggest a way to distinguish between acceptable price adjustment and gouging without making reference to the emotions of the market participants?

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Ray

There's a few flies in the ointment at work here:
One: Potable water is essential for life. Go without for a day, and you're in tough shape.
Two: Dozens of communities were affected-- basically everyone within a 10 mile radius of Boston. Cambridge was unaffected simply because they're the only community in the area that isn't a part of the MWRA water system. However, effectively every town within Route 128 (about 2 million people) lost their supply of potable water.
Three: As a result, "driving a few towns away" to get water wasn't an effective strategy for many. A large number of Bostonians don't own automobiles, and supplies of bottled water were severely strained in every town from Boston to within New Hampshire. (Boston to the NH line is a 30 mile drive.)

So this model works fine for those who can afford the drive to areas where bottled water is still on store shelves. Where it falls apart is with the people who can't afford it.

Some people are still working multiple jobs just to make ends meet. Many have been months (myself, almost 2 years) without a steady paycheck. If you're working 2 jobs a day, where is the time to boil water, let alone drive an hour?

Had the repairs taken longer, this could have been much more of a crisis than it was, and the impact would have fallen disproportionately on those least able to afford it.

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Rudiger in Jersey

This Too Shall Pass. And we have a tendency to think short term, when long term wisdom is needed.

The current emergency will subside. Buyers will return and deal with merchants. After prices subside, there will be a reapproachement and a reckoning of the customer-businessman relationship. A short term gain, may be a long term loss as sour consumers move on to the honest and reputable dealers.

You see the true nature of a person or business when they are under stress. And that is Valuable market Information.

Justin

I'm still waiting on soda machines w/ price tied to weather/ temperature. 101 and sunny? How about a $7 coke. Overcast and 60? Sounds like $1.25.

rustycard

Interesting that in this post-religious age no one mentioned the common good, the social contract or lvoe your brother as yourself. Maybe none of the readers and commenters studied economics at fordham or BC.
Personally I would have noticed who gouged, avoided them in the future and made sure that everyone in my sphere of influence knew what they had done. Make money on me today, but lose a customer for the next twenty years.