Jeff Ely on Price Controls During Disasters
By David Henderson
I had thought that pretty much all economists agreed that price controls during disasters are a bad idea. But Northwestern University economist Jeff Ely has a different take. He writes the following:
But in fact it is quite typical for the consumer surplus maximizing solution to be a rationing system with a price below market clearing. I devoted a series of posts to this point last year. The basic idea is that the efficiency gains you get from separating the high-values from the low-values can be more than offset by the high prices necessary to achieve that and the corresponding loss of consumer surplus.
Why would we only care about consumers’ surplus and not also the surplus that goes to producers? We normally care about producer’s surplus because that’s what gives producers an incentive to produce in the first place. But remember that a natural disaster has occurred. It wasn’t expected. Production already happened. Whatever we decide to do when that unexpected event occurs will have no effect on production decisions. We get a freebie chance to maximize consumer’s surplus without negative incentive effects on producers.
Given Ely’s assumptions–no effect on production decisions–then his claim about maximizing consumer surplus could well be true, for the reason noted in his first quoted paragraph above. Tyler Cowen does a good job of taking on the assumption of no effect on production decisions.
But I want to point out another more-fundamental problem with Jeff Ely’s reasoning: his narrow assumption about why “we” care about producer surplus. Jeff writes:
We normally care about producer’s surplus because that’s what gives producers an incentive to produce in the first place.
I do care about the incentive, but that’s not the main reason I care about producer surplus. I care, fundamentally, because producers are humans. They count too. And their property rights count.
I remember years ago a conference I attended with, among others, Murray Rothbard and Walter Block. Walter said, “What’s the big deal about consumer surplus? Any schmuck can consume.” Murray cackled, as was his wont, and repeated the line. I actually quoted that line when I taught a bunch of federal judges and I was going over the classic 1968 Oliver Williamson piece about economies of scale as an antitrust defense.
I think it would be hard to maintain a coherent ethical system in which producers don’t count. For one thing, almost everyone, at least at some point, is a producer. Why care about them just qua consumer.
I do want to thank Jeff Ely, though, for implicitly pointing out a flaw in the way I teach this, and I just taught it last week. I do the whole analysis in terms of the effects on consumers. By doing the same, Jeff reminds me what I have been leaving out.