Why Do People Hate “Price Gouging” So Much? Economists, Take Note…

Every time a natural disaster or other crisis situation hits, we see two things: one, people outraged that the things they want to buy have higher prices than normal, and two, articles from economists in an impressively tone-deaf fashion arguing that this is a good thing. (To be fair, the economists don’t usually write the headlines, so GFY to whoever did that instead.) I totally get that this fits into the “this is why no one like economists” category, and, at the risk of having my economist badge taken away, I’ll admit that the outrage crowd is not entirely wrong.

The economist logic goes something like this: when demand increases and/or supply decreases, a shortage is created if prices don’t adjust. If prices are allowed to increase, the good gets allocated to those who value it the most. In addition, higher prices encourage sellers to find ways to make more of the good available for sale.

In a couple of ways, people would be well-served to listen to the economists. First, let’s not kid ourselves into thinking that shortages wouldn’t happen or that they’re not a big deal- good luck finding that mythical price-capped plane flight, homies- it’ll be like that time I tried to get the epic reward from Sephora. Also, how pissed would you be if the person in front of you bought the last case of bottled water because it happened to be on their shopping list and not because they specifically needed it? (This is also why rationing often doesn’t work very well.) High prices, among other things, are a reminder to not do that. Second, yes, companies do sometimes make an effort to meet the increased demand without raising prices as a goodwill/PR gesture, but I feel pretty confident saying that we shouldn’t rely on the for-profit sector for its magnanimity.

BUT…and I promised I was getting here…economists also need to recognize and respect that increasing prices in crisis situations still doesn’t sit right with people. It’s not like economists don’t know this- for example, a paper in the American Economic Review way back in 1986 asked survey respondents the following question:

Question 1. A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20. Please rate this action as: Completely Fair/Acceptable/Unfair/Very Unfair

In the study, 82 percent of subjects rated the scenario as unfair or very unfair. (On a related note, I always wonder why no one complains about the umbrellas in New York City that are $3 when it’s not raining and $5 when it is. Maybe because $5 is still a good deal for an umbrella? I think I’m on to something here.) The thing about fairness is that it’s an opinion, so it’s not really helpful to just try to tell the “that’s not fair” person that they’re wrong. Also, economic theory doesn’t try to suggest that even efficient market outcomes are fair, so economists aren’t exactly well equipped to argue fairness.

Another issue with the economist logic is that it’s unclear how much higher prices can increase supply over a very short-term crisis time period. In the hypothetical snow shovel situation above, the store could probably eventually order larger quantities of shovels, but during a blizzard it’s probably just stuck selling the stock it has on hand. If supply doesn’t increase, sellers make more money but consumers don’t get anything more, which, yeah, doesn’t sound very fair. I guess I could argue that it’s likely more expensive/annoying to keep the store open during the blizzard, or that the higher profits just offset the losses from having to close the store when things get really bad, but I do kind of feel like I’m reaching here, especially since most people wouldn’t be super excited about impacted-consumer-funded corporate disaster relief.

Perhaps even more importantly, there seems to be a popular notion that, when prices increase, rich people are just going to buy all of the stuff and leave lower income people with nothing. On one hand, I can’t imagine myself going and hoarding all of the supplies, even though I have a decent income and could conceivably do so. (Not sure I’d have places to put all of it though.) On the other hand, it’s not unreasonable to think that Bill Gates would be willing to pay more for a gallon of milk than I would be, even if we fundamentally like milk the same amount, simply because he’s less wealth/income constrained. Or, to put itless charitably, this:

If there’s a lot of income/wealth inequality in the crisis area, this notion that market equilibrium prices get stuff to those who value it the most pretty much goes out the window, which destroys much of economic argument for price gouging. This is unfortunate, since it seems overly cumbersome to, say, have everyone write an essay explaining how much they need that bottle of water so that the stores can choose worthy recipients. (I actually had a student suggest this once- I think this is what economists refer to as “transaction costs.”) Interestingly, a recent survey shows that the tech crowd is strongly in favor of both income redistribution and surge pricing- this actually makes a lot of sense, since if people are on comparable financial footing then yeah, adjusting prices is a good way to get stuff to people who want it the most without all the essay writing and reading.

Whether you want them or not, I have some suggestions for how to handle potential price gouging situations:

  1. Everyone- think before you call something “price gouging”- it’s obviously a loaded phrase with negative connotation.
  2. Economists- stop trotting out the same tired articles that don’t even try to address why people don’t “get it,” particularly on the income inequality front. (The piece linked above is far better than most in this regard, since I didn’t want to give attention to a garbage article.)
  3. People- acknowledge that yeah, it’s a crisis, so basically all possible outcomes are going to suck in some way, and focus on supporting the least bad feasible option rather than the magical unicorn solution. Some helpful questions to consider: “Is this going to help bring in more stuff?” and “Is this directing the good to the right people?”
  4. Companies- rather than being shamed into not adjusting prices, maybe offer to donate the additional proceeds or something like that. The windfall profits from price gouging are a bug, not a feature.

As a final, somewhat related matter, I’ll leave you with an important observation from my mother, on her way back to Florida to help parents and neighbors:

And, as shown by her location, that’s without the “price gouging.” Stay safe, everyone.