In the current shortage economy, why are some goods are in shortage (in the economic sense: none available at the on-going price), others are simply not produced (intensifying the shortage), and some others (I’ll consider the case of ammunition) are produced as needed and sold at higher prices in violation of the states’ “price gouging” laws or the federal Defense Production Act?
To answer this question, it is necessary to understand the economic concept of shortage, as opposed to a blob intuition (I call it “smurfage”) encompassing all situations where somebody does not have something that he would like to have, but not necessarily more than something else.
In another post, I mentioned many ways in which producers—incentivized by consumers who bid up prices instead of having nothing—can stealthily increase prices (see “Why Shortages Are Not More Widespread,” August 17, 2020). One way is for producers to limit the diversity of their offerings, reallocating production to higher-margin products. Another example of that was provided by the Wall Street Journal a few days ago (“Coca-Cola to Discontinue Zico, May Drop Coke Life,” October 4, 2020).
Like many social planners at heart, Bernie Sanders and Donald Trump don’t understand how product diversity is efficient when it corresponds to consumer demand backed with money. Sanders declared:
You don’t necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers…
In the same mode but for other reasons, Trump said, in his typical baby talk:
I see people buying five dolls for their daughters, maybe buy two dolls for their daughters…
Ways of satisfying consumer demand when government edicts (price controls or political allocation of available supplies) interfere include the black market or, when repression is haphazard and irregular, the grey market. This appears to be the current situation in the retail market for ammunition. As one can easily check online, established ammo retailers charge prices close to pre-control levels but, most of the time, the products are “out of stock” and the shelves, even online shelves, are bare. This market, however, is very competitive with many online competitors who are apparently willing to risk government suits or prosecutions, don’t have a politically-correct reputation to maintain, and charge what the market will bear. Consumers who need ammo for self-defense, shooting, or hunting can thus get some at higher prices—but, needless to say, they remain free to benefit from low government-capped prices and have nothing to buy.
To give an example of the phenomenon, take 9mm cartridges, the most popular caliber for semi-auto pistols. You can easily check at any large retailer that 9mm ammo is still priced at roughly (or discreetly more than) pre-control prices: around $12 for a box of 50 cartridges used mainly for target shooting and twice that price for 20 premium self-defense cartridges. You can also check that on the grey online market, these prices are now much higher—typically about five times more, when they do have the ammo in stock. It is not perfect but it’s better than to have no choice at all.
Note that there is less diversity on this grey market than there used to be on the white market. One reason is that the established manufacturers of ammo are still forbidden to “price-gouge” the retailers and thus have presumably reduced the diversity of their production.
One interesting question is, Why do government prosecutors close their eyes to gray-market suppliers who offer ammunition at market-clearing and illegal prices? One hypothesis would that the government loves gun owners and rednecks, on whom the electoral fortune of the current administration may hinge. By allowing ammo prices to rise up to their market-clearing level, government prosecutors at least allow gun owners (and hunters) who need ammo more urgently to bid up prices; otherwise, long and haphazard queues would be the only hope. Of course, this hypothesis does not make sense as these same governments claim that laws against “price gouging” favor the consumers! Moreover, there are more than 40 state attorney generals who are supposed to enforce “price gouging” laws, a sizeable proportion of whom don’t like private gun owners at all.
The opposite hypothesis—that governments hate private ammo buyers and do not mind throwing them in the jaws of price gougers—does not make more sense.
One explanation of this strange government tolerance for the grey ammo market is consistent with what classical liberal and libertarian theorists have demonstrated. When a government tries to control prices and allocate goods (like in the current emergency), it cannot respect the abstract and impartial rule of law; it has to arbitrarily discriminate among people and treat them unequally. Moreover, government planners are seldom efficient because they have little incentives to be and because they lack the knowledge necessary to control a vast, diversified, and complex economy. Arbitrary interventions and prosecutions also come from the difficulty and cost of going after everybody breaking the law: the personnel of state attorney generals is not infinite and their employers are broke.
We are getting a glimpse at why, in a government-controlled economy, nothing works. The less government-controlled the economy is, the better things work.
READER COMMENTS
Michael Pettengill
Oct 8 2020 at 11:04am
What price controls?
Supply contracts setting price for long terms are not price controls, just good business.
Retailers either don’t seen the shortage from a huge increase in consumption until their supplier fails to deliver new supply as rapidly as normal. Distributors and manufacturers don’t raise prices to prevent retailers switching suppliers, plus a higher price would not cut demand or increase supply, just motivate customers to go elsewhere.
In the case of Coke eliminating products. The sales of zico were too low and not growing, and cutting the price to change that would require pricing zica at a loss – making it 5 cents less than Coke to retailers would not result in retailers promoting it more with more ads or sales, so in a down market due to recession, better to write zica off and stop producing it.
Jon Murphy
Oct 9 2020 at 9:17am
There are significant price controls on ammo. See here.
But if they cannot provide at the current price then retailers will switch suppliers anyway.
But a higher price would reduce quantity demanded and increase quantity supplied. As of right now, the shortage exists because quantity demanded exceeds quantity supplied.
Assuming there are other suppliers with goods on hand, yes. If there are not, then they can pay the higher prices, cut back on their quantity demanded, or some combination thereof.
We do have a bit of a contradiction in your comment, though: why would higher prices induce consumers to shop around but not retailers?
Yes, that is precisely Pierre’s point. You cut out the lower margin stuff for the higher margin stuff.
Pierre Lemieux
Oct 9 2020 at 2:18pm
Very good answers, Jon!
Thomas Hutcheson
Oct 8 2020 at 11:41am
“One hypothesis would that the government loves gun owners and rednecks, on whom the electoral fortune of the current administration may hinge.”
Another would be that they hate these people and think they are likely to do more harm to themselves than to others. 🙂
Pierre Lemieux
Oct 9 2020 at 10:18am
@Thomas: Is this why governments forbid their own employees (notably cops) to carry ammo with their guns, because “they … think they are likely to do more harm to themselves than to others”? Is this also why governments run sensitivity programs to teach all their bureaucrats and other vulnerable clientèles that buying ammo for hunting is bad as “they are likely to do more harm to themselves than to others”? Is this why there is no Second Amendment? 🙂
Myth835
Oct 9 2020 at 1:21pm
Pierre the current view on the US Second Amendment was created by the NRA in the late 1890s. Originally it was viewed as a state’s right as in “A well regulated Milita, being necessary to the security of a free State, the right of the people(of the State of Maine) to keep and bear Arms, shall not be infringed.” A gun was considered just a tool no different than a hammer.
Pierre Lemieux
Oct 9 2020 at 2:28pm
@Myth835: The myth that the Second Amendment, contrary to all original amendments, was conferring rights on the state instead of protecting an individual right was debunked by much constitutional-law scholarship starting in the 1970s. If one is not familiar with that scholarship, it is well summarized by the Supreme Court in Heller, a must-read.
Jon Murphy
Oct 9 2020 at 3:56pm
Thanks for posting the Heller decision. It had been a while since I had read that. It’s really a great read. The dissents are interesting, too
Pierre Lemieux
Oct 9 2020 at 2:37pm
@Myth835: If you want to learn more, the two books on the featured image of this post (one by Joyce Malcolm and the other one by Colin Greenwood, the latter on the English right to keep and bear arms) are also worth reading. Trigger warning: Be prepared for big surprises.
Pierre Lemieux
Oct 9 2020 at 2:54pm
Post Scriptum: In the featured image, however, the box of ammo is mine. It gives a brand for which the reader should be able to check both shortage prices and the grey market market-clearing price.
Myth835
Oct 9 2020 at 5:18pm
From 1988 till the mid 1994 I work for a media archiving service. The company would travel to colleges and libraries around the US scanning media from 1820s -1910. I personally digitized several thousand US Civil War era newspapers. Dozens of articles and editorials from northern and southern states used the 2nd Amendment to support the rebel states in there bid to be “a free state”. The popular option on the 2nd Amendment in 1860s was different then it is now. The view as a currently held I closer to the popular view from newspaper articles and editorials in the late 1890s. There is a lot of media in the late 1890s produced and sponsored by the NRA that was pushing the current view that is held in the US concerning the 2nd Amendment.
Jon Murphy
Oct 9 2020 at 11:49pm
Myth835-
Can you cite specific sources? Given that, prior to the 1930s, the NRA was a gun safety and training organization and didn’t do any legislative behavior, I have a hard time believing that they were influential at all in any formation of opinion on the second Amendment.
Furthermore, when we see that the plain text of the 2nd Amendment says “the right of the people to keep and bear Arms,” it’s quite difficult to believe that the Amendment conveyed states’ rights. Especially when we consider that the Constitution deals explicitly with federal power, not state power. The only time state power is mentioned is Amendment X, where there is a clear distinction made between the state and the people.
Coupled with the Heller decision where Scalia cites the drafting and procedural notes of the writing of the Amendment where they explicitly refer to individual, not state, rights to bear arms (see pages 30-32), I find your assertion difficult to swallow.
I think you might be misunderstanding the early history of the NRA. The early history of the NRA was to help make sure state militias were well-trained in marksmanship. But that doesn’t imply that the right to bear arms applies only to states, or that the NRA was part of some insidious project to change the meaning of the Amendment. Indeed, their earliest legislative actions in the 30s and 40s were in favor of gun control and making it harder for individuals to get and bear arms.
Brian
Oct 8 2020 at 8:40pm
Why limit the closing statement to only stating that in a government controlled econommy nothing works? Nothing that government controls ever works like it is supposed to. Not one thing. That’s why it is often said that the government hates competition. Everything they run they do so poorly and inefficiently at best. And what’s worse is that our government is always expanding, further spreading their control in areas they were never meant to be. The housing market, bank loans, health care, and certainly not firearms. They even included the 2nd Amendment in their masterpiece of writing to ensure that they couldn’t. But that doesn’t seem to stop it from happening. These career politicians have begun to think of themselves as some sort of ruling class to whom the constitution does not apply. Even the most Federalist leaning of our founders never would have wanted the federal governments impact on our daily lives to be so apparent. The sh!t has gotten far beyond out of control.
Charlie Atwill
Oct 9 2020 at 8:17am
Can I hear an “Amen”!
Pierre Lemieux
Oct 9 2020 at 10:22am
@Charlie Atwill: Not from my mouth. I think it’s not from the Pope’s mouth either. I understand from his last encyclical that he loves shortages. I suspect he also hates self-defense except by angelic governments. And he’s not known for his great African hunts.
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