Science writers like to suggest that anyone can understand the intuition behind theories such as special relativity and quantum mechanics, if only they will read this book, or that essay. Don’t believe them—I’ve tried. At best I get a bit of the intuition behind relativity, and none at all behind QM. Yes, I hear the words, but I don’t understand enough of the underlying physics and mathematics for the words to form a coherent picture in my mind. I’m too dumb.
Some economists believe that the public can understand why protectionism is bad, or why price controls hurt consumers, if only the ideas are explained to them in clear language. I doubt it.
Tyler Cowen recently linked to an interesting paper that addresses this issue. Here’s the abstract:
During disasters, citizens call for “anti-price gouging” policies. However, majorities of economists oppose such policies. For democracy to function, citizens should be responsive to policy-relevant information—especially from experts. What impact does exposure to the potential negative externalities have on public support for anti-price gouging policies? We hypothesize that if the public were exposed to such information, they would be less supportive of anti-gouging policies. We employ two survey experiments: one administered in Florida (n = 2085), a state prone to hurricane activity, and the second in the United States (n = 2023) at the onset of the COVID-19 pandemic. Both show that the public overwhelmingly supports anti-price gouging policies, regardless of exposure to information about negative externalities, even when it comes from experts.
Having taught economics for 35 years, this is no surprise to me.
You might object that surely economics is not as hard as modern physics. Yes, that’s true in one sense—you do not need an extremely high IQ to understand economics. On the other hand, the quantity of information required to understand economics is vastly larger than the quantity of information needed to understand modern physics. It’s a far more complex field, despite being much “easier”.
For this reason, economists will often take shortcuts when trying to persuade the public on a policy issue. They might argue that a ban on banks charging a fee for ATM use would hurt consumers because this would reduce the availability of ATMs. Or they might argue that tariffs would hurt the economy by raising the prices that consumers must pay.
It’s true that an ATM fee ban would hurt bank customers and it’s true that tariffs hurt the economy. But not for the reasons that are usually given. After all, it might be the case that the saving in not paying ATM fees is worth more to consumers than the negative of fewer machines being available. And it might be the case that the benefit tariffs provide to our producers exceeds the extra costs incurred by consumers. Neither of those arguments (for price controls and tariffs) is actually true, but they might be true. In order to show they are not true, you must first learn a whole lot of economics.
In theory, students majoring in economics are able to understand these ideas. As a practical matter, most students don’t actually understand these concepts until they get to graduate school.
A science writer can tell me that quantum mechanics is true because of blah, blah, blah, but it won’t sink in. I can explain to the man on the street why price gouging is actually a good thing, but my explanation won’t sink in. It requires too much background information. Here’s just a portion of what you need to know—and I mean really know in your bones:
1. Supply and demand elasticities are far greater than common sense suggests.
2. Public policy is a repeat game—policies need to be evaluated as a long run regime, not as an ad hoc decision.
3. Retailing is a highly competitive industry, with zero economic profits in the long run.
4. Willingness to pay is far less correlated with wealth than you might assume.
5. Price controls are not an effective way to redistribute income.
6. The economy is not a zero sum game.
All of these ideas (and many more) need to be understood before considering the question of price gouging. And not just “understood” in the sense that someone tells you the words; you need to understand the ideas well enough so that you could persuasively explain the claims to your friends.
A while back, I recall some intellectuals claiming that two well-informed rational people should not disagree over a factual claim. Once all the facts are laid out on the table, there is only one rational conclusion. The problem here is that no one has a complete model in their mind, and when debating an issue I don’t have time to teach a 3-year course in Chicago graduate economics, or a 3-year course in MIT graduate economics (which would present a different set of models.) Thus rational people will continue to have good faith disagreements.
Nonetheless, we should not give up just because the public can never reach the desired level of enlightenment. Over the past 12 years, I’ve had numerous people tell me that my blog posts have helped them to better understand a specific economic issue. So we should continue trying to nudge the public toward greater enlightenment, even as we understand that we’ll always be a bit disappointed with the results.
PS. Persuasion can take many forms. Perhaps it would help to point out all of the price gouging that we already allow to occur:
- We allow gas stations to sell gasoline at very inflated prices after a war breaks out in the Middle East.
- We allow a grocery store to sell eggs at a very high price after a problem with bird flu.
- We allow a homeowner in Palo Alto to sell their house for an obscene profit after zoning rules are tightened to reduce supply.
Those are all cases of price gouging. Why don’t we have price controls in those cases? Getting the public to think through each case might help to clarify their thought process.
READER COMMENTS
David Henderson
Sep 22 2023 at 12:52pm
Really good post, Scott.
Scott Sumner
Sep 23 2023 at 10:32pm
Thanks David!
steve
Sep 22 2023 at 1:46pm
As part of the populist agenda there has been a fairly long and concerted effort to delegitimize anyone with actual expertise so I dont find this surprising. Everyone who has watched a 5 minute youtube now knows more about medicine than I do. To be just a bit fair to the populists it’s hard to communicate complex ideas that have nuance. Sometimes experts dont do a good job. Sometimes someone with a POV can easily distort ideas that are not clearly black and white. Heck, sometimes we are even wrong, but the large majority of the time that is not the case.
Steve
Richard W Fulmer
Sep 22 2023 at 2:37pm
Unfortunately, too many experts discredit themselves and their fields by:
Offering opinions on subjects they know little about.
Offering unreserved opinions before all the facts are in.
Writing in dense jargon that is designed to impress rather than to communicate.
Tailoring papers to accord with political fads so that they can get published.
Telling political leaders what they want to hear to gain a “seat at the table.”
Manipulating or cherry-picking data.
Refusing to provide data to potential critics.
Engaging in ad hominem attacks.
Refusing to admit mistakes.
Having financial or personal interests that bias their findings.
John hare
Sep 22 2023 at 1:58pm
Sometimes it helps to use simplified and personal examples. Is it gouging when you get time and a half on top of the holiday pay?
do you know what those linemen make when restoring your power aft the storm? Is that gouging or would you rather do without power?
are you just upset because you don’t get the chance to make a killer profit yourself?
David Seltzer
Sep 22 2023 at 5:01pm
Good stuff John hare!!
ajcwebdev
Sep 22 2023 at 2:56pm
Let’s see how GPT-4 does. You’d probably get better answers if you put each as a prompt instead of all six at once.
Prompt: Explain each of these economic principles in greater detail: copy paste all six exactly as written
1. Supply and Demand Elasticities
Elasticity refers to how much the quantity supplied or demanded of a good responds to a change in price. If the elasticities are greater than what common sense suggests, this means that even small price changes could have big impacts on the quantities demanded or supplied. It indicates that consumers and producers are very responsive to price changes, and this can lead to larger adjustments in market behavior than one might expect.
2. Public Policy as a Repeat Game
Public policies shape the incentives and constraints that individuals and businesses face. Viewing public policy as a repeat game means considering the long-term impacts and the iterative nature of policy decisions, instead of just the immediate effects. Policies create expectations about future policies, and those expectations influence current behavior. Thus, policies need to be evaluated with a focus on establishing consistent, long-run regimes that create stable and predictable environments, rather than as isolated, ad hoc decisions.
3. Retailing and Zero Economic Profits in the Long Run
In economic theory, a zero economic profit in the long run implies that firms are earning just enough revenue to cover their explicit and implicit costs, including a normal return on investment. Retailing is considered highly competitive because there are typically many firms selling similar products, and it is relatively easy for new firms to enter the market. This high level of competition tends to drive prices down to the point where they equal the per-unit cost of production, leading to zero economic profits in the long run.
4. Willingness to Pay and Wealth
Willingness to pay is the maximum amount a person is willing to pay for a good or service. It might be assumed that wealthier individuals would generally be willing to pay more for goods and services. However, willingness to pay is influenced by a variety of factors including preferences, needs, and the perceived value of the good, and may not be strongly correlated with wealth. For example, a wealthy individual may have a low willingness to pay for a luxury item they don’t value, while a less wealthy individual may be willing to pay a premium for the same item due to its perceived value to them.
5. Price Controls and Income Redistribution
Price controls, such as price ceilings (maximum prices) and price floors (minimum prices), are often instituted with the aim of helping low-income individuals. However, they are generally not an effective way to redistribute income. Price controls can lead to shortages or surpluses and create distortions in market incentives, potentially leading to reduced quality and quantity of goods and services available. A more effective approach to income redistribution might involve direct transfers or subsidies to low-income individuals or progressive taxation.
6. The Economy is Not a Zero-Sum Game
A zero-sum game is a situation in which one person’s gain is exactly balanced by another person’s loss. However, economic transactions can create value and are often positive-sum. Trade, specialization, and innovation can lead to increased wealth and well-being for all parties involved, without necessitating a corresponding loss for others. For instance, when countries trade, they can specialize in producing goods in which they have a comparative advantage, leading to increased overall production and consumption possibilities for all trading partners, creating a situation where both parties can be better off.
David Seltzer
Sep 22 2023 at 4:41pm
Scott: I taught corporate finance, investment theory and derivatives at Loyola of Chicago. I quickly learned that the mathematics associated with these subjects brought glazed looks from students. Even from those who majored in those subjects. After a few disastrous mid- terms, I suspended the math and began using real world examples to explain intuition. On tests I would ask students to explain a concept in their words. Not mine. It was rather gratifying to read some of their answers. As for The Special Theory of Relativity, I learned how time dilates because I understood the intuition of the Pythagorean Theorem, Speed of light and Lorentz equations. It took me a few hours to get it. By contrast, I began the study of economics six years ago. I’m still struggling to learn economic concepts and how they apply in real time. My progress has been minimal at best. If I’ve made any progress, It’s because of this blog, it’s articles and library, and John Cochrane’s Grumpy Economist.
BS
Sep 23 2023 at 1:50pm
The mathematics of advanced physics is daunting, and the implications are often difficult to impossible (for most people) to grasp intuitively. But if we were to consider the whole of “economics”, I suppose it has to be the more difficult. Economics must encompass human behaviour. And while much of physics can be explained (predicted) mathematically by relatively straightforward expressions, nothing in economics beyond a simple approximation is likely to be explained without large systems of differential equations.
David Seltzer
Sep 23 2023 at 3:53pm
Indeed!
Emma
Sep 22 2023 at 5:37pm
The problem I’m always thinking about when I see posts about price gouging but never really saw addressed (maybe you can!) is on the consumer side of the issue.
Yes, “price gouging” is a signal to supply. I don’t think anyone I know takes issue with that. The problem I and they see is on the consumer side, or rather on the people with needs side: The gouged good may be absolutely important to someone not able to pay the premium. Or, at least, a poor person still needing the good may have to make painful sacrifices to be able to satisfy the said need while richer people may be able to still buy the goods without any sacrifice since their capacity to pay is well over the poor people’s own.
Additionally, since money is a good, it must be subject to relative and diminishing value, right? The more you have money, the less you should value it. So, a hundred dollars for someone poor (if they even have it…) should have more value than to a richer person. Which means that even if the poor person does not have the capacity to pay for the good, they could value it way more than the richer person who actually buys the good in the end. If this is the case, the good does not go to the consumer who values it the most but rather to the one with the highest capacity to pay (or the one for which money has the less value).Without being able to formulate it like this, but rather by feeling intuitively that something is wrong about this “inefficient” distribution of the rarified good is what, I think, makes lay people disagree with experts talking about supply side signals. Real life experience is not on the supply side but on the people side. And gouging seems to lead to inefficient distribution on the people side.Am I wrong about the “inefficiency” of a gouged good’s distribution? Because, that for me and for people around seems to be the real perceived problem with price gouging.
Scott Sumner
Sep 22 2023 at 5:59pm
“Am I wrong about the “inefficiency” of a gouged good’s distribution?”
Yes. If this were true, it wouldn’t just mean that price gouging is bad, it would imply that any free market is bad. After all, the rich have more purchasing power in all markets.
Suppose a poor person has a maximum willingness to pay of $50, and a rich person is willing to pay $100. You ban price gouging and assume the good goes to the poor person for $50. Now assume he bumps into the rich person while leaving the store. It would be mutually beneficial for the poor person to sell the good to the rich person for something like $75. Thus the most efficient allocation is for the good to end up being owned by the person willing to pay the highest price. What problem is price gouging solving?
But note that in the real world the willingness to pay is far less correlated with wealth than most people assume. And to the extent it is correlated, it’s correlated in all markets. So if price gouging is evil, then all markets are evil. The rich have an advantage in all markets.
Emma
Sep 22 2023 at 6:14pm
Thank you for the quick reply!
I understand. But in your example the poor person gets out of the transaction with 25$ more than he had at first. Which is not the case in the price gouging scenario presented. Would you say it’s important or consequential?
And, just to be clear, I don’t pretend to have a better alternative even if I think there still is a fundamental distinction to be made between willingness to pay and capacity to pay. I was rather saying that this situation exacerbates this market trait which tend to rub lay/common people the wrong way in times of need. Could there be a way to alleviate this perceived problem? Or do you think there’s no problem at all or that the “cure” could be worse than the disease?Thanks again for the interaction, it’s greatly appreciated!
Patrick
Sep 22 2023 at 10:08pm
Emma, you say “in your example the poor person gets out of the transaction with 25$ more than he had at first.” How about instead of banning price gouging, the government gives poor people $25 each. This causes less distortion of the market, does not depress supply of the impacted good and still makes the poor person better off. More generally, if you want to transfer wealth from rich people to poor people, why not do so directly (through taxes and welfare payments) rather than indirectly through price controls?
Emma
Sep 23 2023 at 10:20am
This is my thinking exactly, Patrick, since I don’t think controls work. I was curious about M. Sumner’s (and yours!) thinking about this. I’d wager some if not most people here would be against it, as it is redistributive or inflationary I guess. But maybe I’m wrong!
Scott Sumner
Sep 23 2023 at 10:15pm
I agree with Patrick. The government already does a fair amount of income redistribution. The amount required to offset legalizing price gouging is pretty trivial.
There are far more efficient ways to redistribute income
Emma
Sep 24 2023 at 6:32am
Great! As I’ve said I’m not in favor of controls. I agree with you, Scott, on their dire consequences. As I’ve also said in another reply, I think the way to “convince” common people of the inefficiency of controls, is to engage with their perceived problem with gouging, which seems to be the plight of the more or less poor people in these situations. Talking about solutions to this instead might make them more sympathetic to gouging.
Per your reply, I’m not sure if you agree with helping through a redistribution mechanism. But if so, then I think it would be a better way to engage with lay people’s problem with gouging instead of talking about the consequences of price controls.
Emma
Sep 23 2023 at 6:26am
Oh. Three things I forgot in my response but think bear mentioning:1. What if the person in your scenario does not want/need money but only the good? Or, if the price is gouged, does not have the capacity to pay at all?
2. I think markets are not all as important, at least, from a common people standpoint. Baby formula or medicine are more important than, say, ice cream. What do you think?
3. I never meant/said “evil”. I think it’s important to make that clear. I tried to stay “objective” or at least stay out of “morality” talk. But if I had to choose an adjective to qualify the perception of price gouging, I’d maybe say “not fair”? But, yeah, I’d try to stay clear from these terms to keep on more economical grounds.PS: not sure if I chose the right words, english is not my primary language.
BS
Sep 23 2023 at 2:03pm
Regarding #2, I just think of “market” as a mechanism for people to make exchanges, with no moral dimension or notion of “importance”. The only way to force what people think “ought to be” is mobilization/conscription of resources.
Scott Sumner
Sep 23 2023 at 10:17pm
Yes, baby formula is important, and also a good example of a market where the government recently created a shortage through misguided regulations.
nobody.really
Sep 23 2023 at 3:21am
Fair enough. But consider how markets work: We have a supply of goods, and demand for goods—and in the absence of interference, the market price will bring the two into balance.
That is, if someone tried to sell goods above the “market-clearing price,” unsold goods would pile up on the shelves. In typical markets, a vendor would simply see sales slow. But in extremely competitive markets, such as grain, a seller insisting on setting prices even a penny above the market-clearing price would result in no sales at all.
Conversely, if people sold goods below the market-clearing price, they’d have more people trying to buy the goods than there would be goods to sell. This is what happened in the Soviet Union: Government set prices artificially low—so whenever goods arrived at a store, people would stampede in and buy up everything, leaving the shelves bare for the late-comers. The people who bought up everything at Store A would then try to barter with the people who bought up everything at Store B. Thus they determined a kind of market-clearing price—but it was a wildly inefficient system.
Imagine that a poor person needed a good to save her life—but other people were buying it to use as a frisbee. If prices are set artificially low, it’s possible that the poor person would get the goods at a low price…sometimes. But more often, as in the Soviet Union, the poor person would find that the store’s shelves were bare—and she’d have to go hunting around for someone who had bought the good. This would be inefficient. Moreover, it would be pointless, because the person who would sell this good would demand a price higher than he paid for it—or else, why sell?
What if the law banned selling the good at a higher price? Well, most obviously, the first buyer would then keep it. But, less obviously, the seller would then conceal the transaction price. He’d combine the good with some other good and sell them as a package. Or he’d bestow the good on his favorites, discriminating on the basis of race/class/religion/whathaveyou. Or he’d demand sexual favors.
Remember, whenever a seller is offering something at a below-market-clearing price, it will mean that he’ll have more would-be buyers than he can accommodate, so he’ll be able to exercise broad discretion about who he deals with. The TV show Seinfeld featured the “Soup Nazi”—a guy who sold delicious soup at below-market prices. This resulted in enormous lines—and in the vendor who exercised arbitrary control over who he sold his soup to. The slightest affront would trigger him to declare “No soup for you!”—and you would find that you’d spent all your time waiting in line for nothing.
Bottom line: Yes, poverty sucks—and we can argue about the merits of various programs for managing it. But messing with price mechanisms is almost never the best strategy—both because it almost never works (‘cuz people will find a work-around), and because it just makes things less efficient.
If the poor person needs a good, at least let the poor person know where the good can be found—and then create of social safety net, or launch a Go Fund Me page, or something. Blocking prices isn’t the solution.
Emma
Sep 23 2023 at 10:29am
I understand all of this perfectly, and as I said on another reply, I’m not in favor of price controls. I’m not supposing to have an answer for the problem of distribution that arises when a necessary good raises sharply. I’d tend to think about the redistributive mechanism talked about as a reply above. Surely it comes with side effects… but maybe are they bearable?
The problem being that common people, especially poor ones, can be stripped from necessary but price gouged goods when all other things being equal. And that, is the main problem people around me seem to have with it. Is there something that could alleviate this perceived problem? Maybe. But supply-side arguments won’t convince any lay people reacting to this “people-side” situation.
nobody.really
Sep 23 2023 at 3:24am
Yet often “price gouging” can be someone’s entire business model—so if you prohibit price gouging, you drive them out of business.
Consider masks during Covid. The US had insufficient manufacturers. Demand rose while supply lagged, resulting in a price surge. Banning the higher price might feel good—but it would do NOTHING to produce more masks; it would just give the current vendors arbitrary power when bestowing their limited supply of masks, and discourage new people from getting into mask-making. What we really needed was for someone to have/convert factories to make masks. But that would be expensive. The only way people would do that is if they anticipated the prospects of earning enough during periods of high demand to compensate for the long periods of low demand when their plants would remain idle, awaiting the next emergency.
Or consider electricity: Among the strategies for avoiding blackouts is to have sufficient generators on-hand to manage a surge in demand (say, from unusual weather) or a sudden drop in supply (say, from the failure of a big generator/transmission line). But “sufficient” often means that some generators will simply sit around waiting for an emergency. The people who own the generator need to be able to recover all their costs during these rare emergency periods. If the law prohibits them from charging high prices for wholesale electricity, they simply won’t build the generators—and we get blackouts instead.
More generally, economists speak of “black swans”—rare, consequential events. People invest in “black swan” funds that tend to lose money year after year until an emergency occurs—when they reap an enormous reward because they’ve invested in some rare good or provided some kind of insurance. Banning “surge pricing” would drive black swan funds out of business—and leave other businesses without insurance for certain kinds of risks.
Again, suppressing the market mechanism does more harm than good.
Andrew_FL
Sep 22 2023 at 8:27pm
I think your postscript has actually just given anyone you use it on three new terrible ideas
Joe
Sep 22 2023 at 8:28pm
The ability to predict things helps. I started following you in the aftermath of the 2008 financial crisis and your repeating that policy was too tight and that rates would remain low for a long time bore out.
Recently you’ve said policy is loose and rates will stay high, and that has also been the case. Now whenever I wonder about the stance of monetary policy or even other economic issues, I kind of just ask “what would Scott Sumner say?” I had a couple years of economics classes at Georgetown, so I’m a little ahead of a lay person. But finding a person whose model makes sense and actually explains reality helps a lot.
Scott Sumner
Sep 23 2023 at 10:18pm
Thanks Joe. But you give me too much credit on predicting rates—I mostly just look at futures markets.
Alexander Search
Sep 22 2023 at 9:43pm
How do exogenous shocks affect market clearance, market structure, and elasticities in very small or undeveloped areas? Or across very short durations — say, within the order of hours to weeks? Are there any kinds of crisis or kinds of economic regime change for which, in hyperlocal settings, market behavior has predictable peculiarities?
Scott Sumner
Sep 23 2023 at 10:19pm
What example were you thinking of?
Thomas L Hutcheson
Sep 22 2023 at 9:54pm
All good points. I think another reason (I exaggerate) is that economists look at a price change and think, “Change of incentive.” The public looks at a price change and thinks “change in income distribution.”
Emma
Sep 23 2023 at 10:41am
I think that’s absolutely right. And considering these are lay people we can’t ask them to understand the technical solutions or consequences of any action meant to “manage” the problem, price controls being one, unfortunately.
What your comment made me realize is that by talking about how price controls are bad, experts don’t engage the problem perceived by the public. Common people don’t care about price controls in the end. They care about being unable to procure themselves or others with needed goods.
If you want to convince people that you should not control prices, talk about helping cash-strapped people who still highly value gouged goods while being unable (or with heavy sacrifices) to get them. Engage with the people’s problem, not the economist’s one.
Thomas Hutcheson
Sep 22 2023 at 10:06pm
There is an apocryphal story that Bertrand Russel and Alfred North Whitehead were discussion economics and Whitehead opined that it was too easy, but Russel thought it was too hard. [Works as well vice versa.] 🙂
Rajat
Sep 22 2023 at 10:28pm
I agree with David H, this is a really good post, very thought-provoking – you’ve still got it, Scott!I have been pondering this question myself lately – about how does economics get “into one’s bones” – but I have a different take to you. I don’t think you need to know or fully accept those six propositions to agree that price controls or tariffs are bad. Apart from the 6th one (rejection of which basically implies a rejection of the value of exchange – that is, neoclassical economics itself), plenty of centre-left economists would not accept them at face value but nonetheless agree that price controls are generally bad policy. Do people only really learn economics in graduate school? I never went to graduate school, although my bachelors’ honours year was probably like the first year of an average US economics graduate degree in the 1940s. Certainly, working in economic policy and reform and reading blogs like yours and others has helped me. Then, at the other extreme, you have eminent PhD-trained economists like Steve Salop arguing for anti-price gouging rules.No, to think that tariffs or caps on ATM fees are bad only really requires a basic familiarity with (or remembrance of) partial equilbrium graph-based analysis incorporating sloping demand and supply curves, and a willingness to accept that model as a reasonable abstraction of the world around us. Therein lies the rub. Many people who aced their economics studies don’t accept that model as accurate, and empirical research, even if well done, doesn’t easily convince most people. One must take on a degree of faith or trust in what one is being told. That’s why it is hard to be truly polymathic, because most people can only look at the world through one lens. Plenty of people in Australia (like me) studied economics and law concurrently at university. But it’s very hard for me to genuinely consider real-world problems from the perspective of a lawyer. Likewise, those with the same academic background who went on to become lawyers really struggle to think of problems like an economist. I see it as the ‘native tongue’ one develops in one’s 20s, whether aided by advanced training or not. (I’m not sure if, say, Janan Ganesh studied undergraduate economics, but my hunch is that he would think price controls were bad policy). By ‘native tongue’, I mean: if confronted by a stranger during sleep, in what language does one scream? Very few people these days are taught or encouraged to scream in ‘textbook’ economics.
Scott Sumner
Sep 23 2023 at 10:22pm
“you’ve still got it, Scott!”
Thanks, but the inspiration comes less frequently with each passing year.
TGGP
Sep 23 2023 at 1:10am
That’s Aumann’s Agreement Theorem.
MarkW
Sep 23 2023 at 6:29am
Here’s just a portion of what you need to know—and I mean really know in your bones
I’m not sure it’s really that big of a lift. I do agree that getting most ordinary people to read this book or that article or listen to an economics podcast isn’t going to cut it and that even when they fully understand the arguments (at least for a time), it doesn’t sink in fully or convince them or have any staying power (or make them resistant to bad, but emotionally appealing counterarguments).
What does seem to move the needle a bit is experience with everyday ‘price gouging’. People have come to accept Uber surge pricing and grasp the logic of it. You have to pay more to get drivers to work on Friday and Saturday nights when they, like everybody else, would rather be socializing — and you have to pay even more because you need more drivers then than at normal times because more people want rides then. People also understand why electrical line workers need to be paid a premium to be convinced to travel to other states away from their families and do difficult, unpleasant, potentially dangerous work for long hours and under pressure. The same goes for people who travel to fight forest fires.
The next step seems like it is to get them to understand that people who provide scarce goods and services in disasters are doing something comparable. They’re taking financial risks (to buy those goods they’ve bought might not actually be needed), and enduring some of the same kinds of privations as the linemen and fire-fighters in remaining in place to sell their goods rather than evacuating or in hauling those goods into a disaster area despite the dangers.
The last step, it seems to me, is to separate the functions of 1) supplying goods and services from 2) philanthropy. So we may expect hospitals to operate as non-profits, but we don’t expect medical professionals to work for a discount (any more than we expect that of linemen of fire-fighters). Similarly, we shouldn’t expect the people who bring in the generators to sell to give them away to people who can’t afford them, but there’s no reason local philanthropists can’t buy some and donate them to the needy. I don’t think it would be too much to expect people to come to accept this distinction. But they’ll do it mostly by seeing it in action ‘on the ground’ over time and having it seem normal, not through argument.
Todd Ramsey
Sep 23 2023 at 10:44am
As a pharmacy owner at the onset of COVID, I can attest that public disapproval of price gouging is profound and affected my business both legally and reputationally.
In April 2020, after countless requests from customers, I acquired some paper masks at a ludicrously high price, a 20-fold increase from what I previously paid. I applied a normal retail markup and advertised availability, correctly assuming that some customers would welcome the opportunity to find masks at any price.
My business faced an immediate backlash on Facebook accusing us of price gouging. The hard-earned 50 year reputation of my business was at risk, so I cut retail price to my cost and sold my limited mask supply to first comers.
Soon thereafter, I was accused by the state Attorney General’s office of price gouging. I was presumed guilty unless I could provide evidence that I was not price gouging. After some back and forth, the Attorney General dropped the investigation when I showed that I sold out my limited supply at cost.
Then I gave the vocal minority and the Attorney General what they wanted: masks at the pre-pandemic price, with zero quantity supplied.
Paging Ayn Rand.
nobody.really
Sep 23 2023 at 12:10pm
Thanks for posting this.
BS
Sep 23 2023 at 2:10pm
“Then I gave the vocal minority and the Attorney General what they wanted: masks at the pre-pandemic price, with zero quantity supplied.”
Something to be inscribed on a large brass plaque and mounted above the doors of every legislature and executive office.
David S
Sep 23 2023 at 11:09am
The branch of economics that deals with money and monetary policy is more mind-bending than anything in physics or mathematics. Scott acknowledges this in his books and blogs, but the weirdness goes so deep that no one can explain it completely. Case in point: The Fed is maintaining a high funds rate that is effectively a loose money regime. (I hope I described that correctly!) In 2008 the funds rate was zero and money was so tight most of us were groping our way through a miserable and unnecessary recession.
I think that some economic concepts like supply and demand are more effectively grasped when they’re described without using money as an intermediary. A flint axe head is worth twenty dried fish in a place where there is a scarcity of flint. The same axe head is only worth one dried fish in the place where there is an abundance of flint. A few short millennia of trade and capital development later and nobody understands the value of either.
nobody.really
Sep 23 2023 at 12:08pm
“People often say to me, ‘I don’t see how you can work in physics; it’s so complicated and difficult.’ But actually, physics is the simplest of all the sciences….
But in the case of an infinitely more complicated system, such as the population of a developing country like India, no one can yet decide how best to change the existing conditions….”
Luis W. Alvarez’s speech at the Nobel Banquet in Stockholm (December 10, 1968)
Nicholas Decker
Sep 23 2023 at 2:07pm
I am somewhat terrified that getting the average citizen to think more about those examples would simply lead them to favor price controls in everything.
Dylan
Sep 23 2023 at 5:40pm
At the risk of outing myself as one of those undergrad economic majors that don’t fully grasp in my bones economic concepts, I’ve been coming around more to the importance of social norms where it might seem in the near term that the response is inefficient and harmful, but when you zoom out a little further, the “normal” person reaction actually makes sense. On price gouging, I thought several of the replies over at MR gave a more nuanced story. Here’s one example from Sure:
I’m also reminded of an Econtalk episode with John List, the Uber and Lyft economist. One thing that stood out in that conversation was the observation that
Basically, they don’t see much increase in supply from surge pricing because of unanticipated events that cause surges in demand. They see a bigger effect that raising the price has on the demand side. This kind of fits in with the normal persons intuition about price gouging during a disaster. Maybe for something like a hurricane, when you have models and have a decent chance of predicting where one is going to hit, the ability to raise prices a bunch would encourage people to bring in supply beforehand. But, for things like an earthquake, where they are much more unpredictable, I’m doubtful you’d get a ton more supply sitting around ahead of time. The costs are just too high to store a bunch of generators in San Francisco for something that might happen once every 50 years or so.
Scott Sumner
Sep 23 2023 at 10:30pm
If the price were high, people would truck in generators from other cities. In any case, even if it was only demand that was affected, that would be reason enough to allow price gouging.
I understand that in some countries people will riot over high prices, but that doesn’t make it right. Thank God we are not like Nigeria, holding gasoline prices way below equilibrium.
Dylan
Sep 24 2023 at 9:04am
Thanks for the reply, Scott.
On the supply side, I’m not sure I buy that. Many times in an emergency, the area that needs assistance is pretty inaccessible, blocked off by flooded or damaged roads, so it can be difficult to get in to bring new supplies. If that’s not the case, there’s not going to be as big of a supply problem to begin with, as even at the normal price, generators will move from the area where there isn’t demand to the one where there is.
And on the demand side, prices already rise by a lot during a disaster, they just do so in less obvious ways. Big queues and rationing, rather than monetary increases. Of course, the rich could theoretically pay someone to wait in line for them, although I don’t recall hearing of that being common. I think again, social mores come into play and that would be seen as going against the “we’re all in this together” social cohesion that comes about in a disaster.
Maybe we’d be better off if we could convince everyone that the best way to help people is to let the market work freely, even during a disaster. But honestly, I think there’s much bigger fruit close to the ground that I’d like to pick first. Allowing markets for kidneys and much more free movement of people from one country to another are the battles I’d like to fight.
Scott Sumner
Sep 24 2023 at 2:07pm
I disagree on all points. In the US, disaster areas are not generally inaccessible. And a high price induces a faster supply response than a normal price.
As far as social cohesion”, I’d prefer we try to avoid the type of social cohesion you see in Nigeria, Argentina, etc.
And again, it’s a mistake to view free markets as benefiting “the rich”. They benefit everyone.
Dylan
Sep 25 2023 at 12:13pm
Really, all points?? I thought for sure I could have at least gotten some agreement on the kidney marketplace.
And, I’d like to state clearly that I don’t view the markets as benefiting only the rich. But, I think that is the perception that lots of people have. I think things that contribute to that perception, particularly in highly visible disaster situations, whether or not they are true, ultimately weaken public support for markets, which hurts us all.
Kevin Corcoran
Sep 25 2023 at 5:02pm
You wrote:
This reminded me of an essay Mike Munger wrote for this website many years ago, describing just such a situation. He describes how in the aftermath of a hurricane in North Carolina, a couple of “yahoos” (his word for them!) realized that ice would be a hot commodity (I will not apologize for that pun) and decided to rent some refrigerated trucks and load them with bags of ice and take them to the impacted areas so they could sell the ice at a big markup. And, given that a hurricane had just come through, many of the roads were blocked off. However:
If an area is difficult to access, and you want the difficulties cleared out as quickly as possible, making it profitable for someone to do exactly that is probably a good idea! Particularly with the positive externalities it creates by opening up the path for other vehicles to use as well.
Majid Ali Sanghro
Sep 24 2023 at 12:36pm
Kudos to Scott Sumner for shedding light on the complexities of economics. As an economist, I’ve seen that price controls and protectionism often bring unintended consequences. For example, price controls can lead to shortages, and protectionism can result in higher prices and lower-quality goods.
Tyler Cowen’s article highlights an interesting point: price gouging, often seen negatively, can actually be beneficial in allocating resources after disasters.
To make informed economic policy decisions, understanding concepts like supply and demand is crucial. This knowledge helps us anticipate the effects of policies.
Through my blog, MASEconomics, I strive to simplify economic concepts and make them accessible to everyone. By thinking economically, we can make better choices and work toward a more prosperous society.
Jim Glass
Sep 25 2023 at 12:22am
Of course the public does, and for good reasons. As any capable psychologist, trial lawyer, salesman, or Hollywood screenwriter can explain. People have strong emotional and motivational reasons, deep-rooted and rational, to detest price gouging. That’s why they all agree. We humans have a strong evolutionary, genetic drive to detest unfairness and inequality…
… which gouging very much looks like. Plus, of course, it costs people money in a time of hardship. So they en masse hate price gouging. Entirely rationally. Surprise.
To counter this, “experts” expose them to such concepts as “negative externalities” and information they can’t understand — while totally ignoring their strongly felt concerns. With a subtext conveying the clear messages: “Your opinions don’t count (we ignore your concerns), we’re smarter than you (you don’t know what an externality is?), so you should just obey your betters”. Wow, how could that not convince? It’s so puzzling. 🙂
When experts in economics talk about things like externalities they speak to themselves about what impresses each other. Experts in persuasion – from shrinks to screenwriters – speak to their audience about the things that matter to them, to their emotions.
Well … when Superstorm Sandy hit here and left the region without electricity for a week, price gouging was a huge topic – everybody ‘full animal instinct’ against it, of course. But I turned several of my friends around. One who is a prof was impressed enough to ask me to talk to his class (law, not econ, nobody knew any econ.) It went like this…
“So what do you all think of price gouging?” “It’s evil, boo, hiss.” “Why?” “It’s making money off of others’ hardship.” “OK, I got that. And we want what’s best for everybody, right?” “Yes, we do.” “OK, so here’s a true story. When I was a kid I had a big model trains layout set up on a huge plywood sheet. So say a hurricane hit Florida when my dad was buying that plywood. Who needed it more, him or the people in Florida”. “The Floridians”. “OK, so that plywood should’ve gone to Florida?” “Yes.” “I agree. How do we get it there?” Silence – ignorant law students. “What determines where goods are sold?” Monty Pythonesque confusion. “If the price of plywood is higher in Florida than anywhere else, where will sellers of it sell it?” “In Florida.” “So…?” “Its price should be higher in Florida.” “But you said price gouging is evil.” “This isn’t price gouging, nobody is being gouged”. “What about me? I don’t get my train set.” “You can wait to get your trains when the storm is over”… etc. Socrates was right, people know more than their motivated reasoning lets them realize. But they can “remember” when asked.
The discussion went on about motel room and gasoline prices. They got it. No economics ideas used, not a whit. I put everything in terms of what they wanted — They wanted to be able to get gasoline for their cars. I turned around a good part of the class, not everybody, but all now realized there were issues to consider. What more to hope for?
But forget me and price gouging, small potatoes. How about being a prof teaching BLMers on campus that all their outrage about police killing blacks is bogus. Would you be cancelled? Suspended from teaching? Watch a sociology professor do it and prosper!…
https://www.youtube.com/watch?v=FBpPSVQHSmk
… five years ago. At the peak of the BLM movement.
Two days ago the alorithm, now using precognition, sent me this video about Aristotle’s rules for persuasion as used in cinema, with examples good (John Huston to The Simpsons) and bad. It’s excellent (funny too) IMHO.The rules: 1) you are on the same side as the audience, NOT teaching or lecturing them; 2) you make an appeal of some kind (to justice, brotherhood, whatever) which bonds them emotionally to you; THEN 3) You start feeding them facts, preferably by asking questions, so you actually “tell” them as little as possible. They realize things for themselves — people always believe themselves!
Psychologists, trial lawyers and salesmen use 1, 2, 3, all the time. So do demagogues. Look at Trump’s speeches, he’s a master of 1,2,3. Why leave it to us lawyers and demagogues?Using Aristotle’s rules you can convince near anyone to believe near anything — even the truth!
James R Glass
Sep 25 2023 at 4:21pm
It seems a comment I submitted last night didn’t pass muster. Perhaps the moderator can e-mail me why, so I can avoid repeating error.
Grand Rapids Mike
Sep 26 2023 at 2:00pm
Time to repeat my Economist Joke. So the President is trying to select the Head of the Federal Reserve. He interviews an Accountant, Physicist and a well known and highly learned Economist. He has only 1 questions, what’s 2 plus 2. The Accountant, thinking it’s a stupid question, says tersely “it’s 4”. The Physicist thinking he must use the answer to illustrate his brilliance says “it is the first directive of 4x.” The renounced economist, pauses, thinks deeply about the question, whispers into the Presidents ear ” what do you want it to be”. That is why the renowned Government economists said inflation was transitory and why classroom principles seldom make it into sound policy.
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