Are anti-gouging laws counterproductive?

[myp]

In economics, the effectiveness of price gouging is a very arguable topic. Allowing price gouging might actually be a good thing when it comes to the allocation of resources. Not only do higher prices provide a greater incentive to beef up the supply chain, but those who need resources the most during limited supplies would get prioritized since they are willing to pay more. It would be a counter to hoarding that we often seen in instances like Sandy, which is often a poor allocation of resources.

There are studies and data behind the argument, but outside of economics a lot of people just assume it is a supplier taking advantage of the consumer (not necessarily the case). A lot of states (if not all) including NY and NJ have anti-gouging laws which have kept prices (especially with gas) artificially low leading to a large supply-demand imbalance.

Thoughts on this?

 

[tecoyah]

I see price gouging as little more than market fluctuation, as long as it does not become a standard of an industry. If an individual company decides to up prices they are at risk of losing customers and market share...if however, it is a coordinated decision that forces consumers to accept it due to a lack of options, it becomes corruption.

 

[clax]

Price gouging for much needed commodities seems a bit like a company taking advantage of people in their time of need. But in all honesty human decency seems to give way to survival of the fittest. yet another subject I am torn on. I live in a part of Texas that gets hurricanes every six or so years. Normally they are as weak as sandy was when it made landfall, but a couple years ago we got hit by a category 3. Had no electricity for 19 days. I don't evacuate, I live in to high an elevation. The fuel stations still gouge, because they can.

 

[Hammer]

What do you prefer? Empty shelves or gouging?

 

[tecoyah]

Neither...as it should be.

 

[myp]

Neither...as it should be.

What do you mean? Higher prices would likely boost the supply chain more, there is no getting around it.

 

[tecoyah]

Higher prices do not equate to price gouging.

Limited supply may increase costs due to supply and demand, but price gouging to me is tantamount to blackmail...you must pay what is asked based on absolute need.

 

[myp]

Higher prices do not equate to price gouging.

Limited supply may increase costs due to supply and demand, but price gouging to me is tantamount to blackmail...you must pay what is asked based on absolute need.

I don't understand the argument you are making. Is it for or against gouging?


Keep in mind that the thing with gouging is, it is hard to tell whether it is a legitimate increase in price or it is illegitimate (if that even exists, which arguably it does not).

 

[tecoyah]

I am against gouging, based on experience in emergency situations.

When prices are artificially raised simply because you know people will pay it due to adverse situations...this is gouging.

Otherwise it is free market capitalism.

 

[myp]

I am against gouging, based on experience in emergency situations.

When prices are artificially raised simply because you know people will pay it due to adverse situations...this is gouging.

Otherwise it is free market capitalism.

But those who are willing to pay the most are often the ones who need it the most (and the rich for whom money doesn't matter). That aside, such high prices increase the supply faster given the cost-benefits for any given supplier. For example, a convenience store owner might not take the risk to go across town to open his store at regular prices but if he can make extra profit that might be the marginal driver to getting him to open his store. And this extends to the supply chain where store owners, etc. work harder to get their stores restocked, thereby putting downward pressure on the high prices at the same time.

 

[tecoyah]

I was assuming the legal definition of "Price Gouging"...rather than capitalism:

"Price gouging statutes seek to stem opportunistic behavior, which is designed to take advantage of an unforeseen opportunity to charge a monopoly price by threatening to withhold output. It is often defined as a 10 to 25 percent increase over prices during the month before an emergency. One state defines “unconscionable price” as an amount charged, which either represents a “gross disparity” or “grossly exceeds” the average price available for these items and services in the same area 30 days immediately before a declaration of a state of emergency."
http://definitions.uslegal.com/p/price-gouging/

Free market pricing was not my direction.

 

[myp]

The issue is that the legal definition doesn't mean anything in the context of real markets. The 10-25 percent is very arbitrary and in cases like Sandy, the natural increase in price minus any devious intent (again if that even exists) would in many cases easily have surpassed that 10-25 percent. The government put a price ceiling on it though and we all know how that usually goes...

 

[Hammer]

What do you mean? Higher prices would likely boost the supply chain more, there is no getting around it.

Also, higher prices help prevent hoarding, people buying more than they need, when supplies are short.

 

[tecoyah]

In emergency situations "Real Markets" seldom exist. Using the Sandy example...someone selling a $400 generator for $2000 may actually sell out, but will just as likely sell three to those who can afford it, preventing 20 people with $400 from keeping the kids warm.

 

[=Zoomer=]

What do you prefer? Empty shelves or gouging?

Fixing this problem is fairly simple, and self-regulating. However, it's also politically unfeasible (at least right now).

Laissez-faire Capitalism as an economic system has one major flaw. It has no metric to evaluate the flexibility of demand as price increases and decreases. In other words, it doesn't understand the difference between buying a tv and buying a heart transplant.

Simply applying Socialism to the problem doesn't help, without establishing some sort of reliable metric to measure the "necessity" of goods and services. There is an answer. Measure the elasticity of demand as price moves up or down. Establish (using simple math) a scale representing that flexibility using consumer data, and then establish a graduated industry profit cap on those issues that cross a certain threshold.

So how does that work? For those industries where demand is "more" flexible, and above the threshold, let free-market capitalism self-regulate. For those issues that cross the threshold, assign a profit margin percentage cap appropriate for that level of flexibility. And finally, for those issues that would cross the lowest profit margin (highest necessity rating), use a Socialistic approach. Doing so will control costs, and obviously control "gauging".

Also, the metric is "self-regulating", in that as consumer data changes, the rating automatically adjusts. Takes the guess work out of the problem, and overcomes the "Socialism phobia". It protects consumers by it's very nature, and also provides "adequate" incentive to promote growth and competition.

If you think about it, how is business entitled to excessive profits, when they didn't have to create (by degree) the markets they profit from? They shouldn't. If I'm a doctor, I don't need to create sick people. To a lesser degree, if I'm a grocery store, I don't need to create hungry people. But if I'm a television retailer, I need to make it as attractive as possible to buy my televisions, and thereby "build a market" for my product. Different degrees of investment.

Thoughts?

 

[myp]

In emergency situations "Real Markets" seldom exist. Using the Sandy example...someone selling a $400 generator for $2000 may actually sell out, but will just as likely sell three to those who can afford it, preventing 20 people with $400 from keeping the kids warm.

An emergency situation does not destroy a market. Price increases are part of a market. And responding to your example- if profit maximization is the game they will probably price discriminate (or possibly not have to) to the point where they sell all the merchandise anyway- so they make more money but the 20 people (albeit maybe a different 20 people who were willing to pay more) are still warm.

Furthermore, he might be willing to pay the supplier an extra couple of hundred as a risk premium to get his truck driver out to bring in more generators (that's the supply chain effect).

And Hammer's point ties into this with the $400 buyers and the $1000 buyers- not so much the case with generators, but with things like gas and food people end up hoarding, which just means those who get to the store first win, not necessarily those who need it the most.

 

[tecoyah]

I see your point(s)...still agin' it though....heh

 

[myp]

I see your point(s)...still agin' it though....heh

It's a tough one, but I haven't seen too many strong economic arguments for anti-gouging laws. Most economists seem to be against them although there are some concerns.