St. Maximos' Hut

A good analysis of "price gouging" and why a price rise after a disaster is not a bad thing.

Consider — if a gas station owner has gas, someone has to decide who gets it. If the price remains at pre-hurricane levels, many will fill their tanks, because they can afford to do so, against the chance (and even likelihood) that gas will later become completely unavailable (a self-fulfilling prophecy if the price is not allowed to rise). Many will do so even if they have no immediate need for it. But after the first few people do this, the gas will be gone, and none will be available for those who come after, because it's now tied up in the gas tanks of those who didn't really need it. Those who didn't get any may include emergency workers, or truck drivers who need it to go out and find other goods to bring in. It is likely worth more to them, but they didn't get it, because the price was artificially fixed. Moreover, had the price been allowed to rise, they would have been able to afford it, because they would have been able to demand more resources with which to pay for it — the emergency worker might have had aid from local agencies to pay for it, or the truck driver might have been willing to make the investment in order to recover it by bringing in necessary goods (assuming, of course, that prices on those weren't capped).

Attempts to prevent price rises under such circumstances mean there will have to be an alternative means of deciding who gets the scarce resource. Rationing by means other than price seems likely to produce bad outcomes quite often. Of course, so does rationing by price - the poor don't get any.

But there is a response to solve the problem with price-based rationing - the well-to-do give money to the poor. What's the solution to a rationing scheme that allows bureaucrats to favor their friends or patrons at the expense of everyone else? You've got to win the next election and replace the bureaucrats, at a minimum.

So what would a moral gas station owner do? Seems to me he'd raise the price to market levels and take some of the profits and give them to deserving cases (and, being on the spot he probably can evaluate who is deserving better than most). The rest of us incur an obligation to start writing checks to charities who will put people on the spot.

Perfect? Far from it. But likely to produce a far better outcome in both moral and economic terms? I think so.

I'd especially welcome comments, since I'm still thinking this through (as is obvious).


Update: there is a good post on this at Tully's Page