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I have a number of economic/policy/market imperfection posts that I've been tempted to post about for a while. In the wake of Sandy, a friend's post about hour-long lines at a gas station in NJ, and a Slate article that was surprisingly close to my own view on it, I'm going to address Price Gouging. Hopefully more to follow.

So, the question is, to what extent should there be government and/or societal pressure against so-called price gouging? My current stance is that we should allow much more than we do, but perhaps not an infinite amount. I can think of a couple of reasons to allow price gouging, the end effect hopefully being to increase the number of people who can acquire emergency goods as well as reducing crazy lines (maybe).

1) "Gouging" can prevent or reduce hoarding. People would be less likely to fill their gas tank up to the top if gas is $10 a gallon during an emergency, and will take just what they need to make it for a couple of days.

2) To increase supply: This can work at various stages: a) before an emergency is even projected, by leading to companies always keeping more potential emergency stock on hand just in case they can make a profit on it. b) in the lead up to an emergency, because it is worth it to ship in more supplies just before the storm. c) even during the emergency, by increasing incentives to ship more stuff in even while the emergency is on-going. Also, as pointed out in the Slate article, something I hadn't thought of before is that this also can increase the incentives to pay employees extra during the emergency so that they are more likely to go to work in order to sell the goods in question.

Potential Drawbacks:
I can imagine extreme cases where gouging crosses a morality line. E.g., if Person A is drowning, Person B should not be asking how much will Person A pay to get the nearby lifesaver thrown to them.

There is a subtle difference between morally appropriate price elevation and morally inappropriate market manipulation (see, e.g., Enron and California). I could imagine situations in which sellers might create an artificial appearance of scarcity to encourage people to pay inflated prices. Collusion could be a problem.

This could potentially lead to companies who profit from emergencies discouraging NGO and government aid, which would cut into their profits. E.g., reductions in FEMA funding.


Potential Alternatives:
Unlimited gouging! Let the wild market rumpus begin!

Putting a cap on price gouging that is much higher than present, but not infinite: e.g., maybe allowing a doubling of price? (NJ apparently has a 10 percent cap currently)

Having quotas during emergencies, rather than price increases. This addresses hoarding, but does not lead to increased supply incentives.

Any others?

For further reading, I thought that this Slate article was pretty decent.

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