"Why should products just go to the lucky and well-connected?" A typical response is, "Why should products just go to the rich?" A complex debate ensues. Your rhetorically palatable exception not so palatable any more. Instead you need a rhetorically palatable rejoinder to that response.
The answer is that they don't go to the rich. Everyone just uses less, so there's no shortage.
The price system is also the only system that can efficiently allocate by need. You couldn't line up every person in every store for every product and objectively judge who needs it most.
"Why should products just go to the rich?" (First a clarification: they are not going to the rich, they are going to the people willing to pay the clearing price. Which can or cannot be richer)
But even assuming your wording: because that "system", allocating the products to the people willing to pay the clearing price / the rich", incentive production of the scarce good and the development of substitutes and moderate consumption or redirect it to a substitute.
Everybody (the willing to pay and the not willing to pay) are then better served than using "lucky" or "well connected" allocation.
This "result" is so clear empirically that the need of keeping explaining it is just unbelievable.
That absolutely works over the medium-to-long run.
But the classic example is bottled water after a hurricane. During the immediate post-hurricane aftermath, no matter how much the price of bottled water rises, no one is going to find a way to bring appreciable amounts of bottled water in. But by a week later, municipal water will be working just fine, and there's no need to incentivize more of the short-term shipping (particularly if it will interfere with other short-term use of the roads, perhaps by the utility crews working to restore municipal water).
In this sort of short-term crisis, it's really not clear that allowing prices to float improves the supply in any non-negligible way - it just changes distributional features so that it's the people with more cash to spare that get it. Of course, it's better not to just continue to sell it at the old cheap price during that period so that it's just the people who happen to be free to get to the store when the storm immediately clears - it's likely better if this short-term supply is allocated in some sort of more centralized way.
Or at least, you can't use any sort of equilibrium argument to argue that this isn't better, because this sort of short-term situation exists entirely out of equilibrium.
"it's likely better if this short-term supply is allocated in some sort of more centralized way."
And this is just because you are imagining "ideal centralized ways of allocate" the product ("allocation by all knowing angels", very likely). It would be great if you can explain, with some detail, which precise "centralized way of allocate the product" you have in mind.
"During the immediate post-hurricane aftermath, no matter how much the price of bottled water rises, no one is going to find a way to bring appreciable amounts of bottled water in." This is false. A straightforward business model would be to look at where hurricanes are predicted to hit, and in the week beforehand rent some local short-term warehouse storage and fill it with bottled water. Then, once the hurricane hits, you already have all the supply you need. Of course this is a *much* more expensive supply chain than just-in-time deliveries to the grocery store, but if customers were willing to pay the increased price it could certainly be done.
Obviously, market prices don't work when there are no markets (as it is the case in the first week after a hurricane).
But if your argument is that since markets don't work in the first week after a major hurricane we have to resort to "central allocation" after any supply chain issue (like a pandemic or a war in Europe), I don't get it.
As far as markets keep working, they provide the best pricing signal available. If markets are shoot down (by any reason) obviously they cannot be used to this purpose and we will have to resort to the second best alternative available (which will be, in any case, worse that having well functioning price setting markets)
I don't make the argument in the second paragraph, that since markets don't work in a true short-term crisis, they therefore shouldn't be used in a longer-term supply-chain issue like a pandemic or war.
But I think that the original post here, and most of the comments, just glide right over the problems of true short-term crisis, and pretend they don't exist, when these are the most salient examples of "price gouging" that non-economists think of. If you want to get past those impressions, then it's important to specifically address the comparison and try to outline some criteria that importantly distinguish them.
"During this lumber shortage/chip shortage/gas shortage, I want to reward the businesses and entrepreneurs that are doing the hard work of bringing extra supply to market, so that you, the customers, can have them. I will pay them extra for that service, and to save quantity for those who need it most, I will be temporarily raising prices for customers as well. Let us hope that they get supply up to good amounts soon so that we can get back to the old prices."
"These are the most salient examples of "price gouging" that non-economists think of."
The most salient examples of price gouging for non-economist are, for instance, gas in Europe in March, -April 2022 or toilet paper in March 2020 or generators BEFORE a hurricane ... in all these examples markets prices do the most efficient job allocating the scarce products.
[In some of the examples, like generators in a hurricane, is relevant to take into account that these are not unique events. Once you "play" them once a year in the same areas the logic of markets works perfectly well in these cases too]
If you can find situations in which: a) markets keep working and b) they are not the best solution to allocate the products, please let me know. I can't find any.
And if they do exist, I am pretty sure they are irrelevant to the general argument that you summarized so well in your last paragraph. Except for the last sentence. I don't see any reason why the "old prices" have to be better that the "new ones". That looks to me as "status quo bias": if prices never get back to the previous levels it should be because productive resources are better allocated now.
[i.e.: the world is, very likely, a better place with Russia and the Russian gas commercially isolated from the rest of the world forever]
Jose, you seem to be committing the 'econ101' fallacy, which is to assume that simply economic laws work in all cases at all timescales. I'm sure you didn't intend it? Markets only balance themselves as you describe for *most things* under *long time scales*.
I don't think your substitution argument works in the current context of a GLOBAL supply shortage. And moderation does not really work for goods we need, like toilet paper, PPE etc. So there are plent of cases where your argument fails to hold.
Why shouldn't work in a GLOBAL (whatever it means) supply shortage? Which of the premises or mechanism does not hold because of the "Global" nature of the shortage?
Well, you would be amazed of your "efficiency improvements" in a $1,000 toilet paper rolls scenario!!
Products in shortage, sold at market prices, don't necessarily go to the rich. They go to whoever is willing to pay the most. In other words, to those most desperate for the product. Sometimes those will be rich people, often not (rich people don't like wasting their money either).
There's a lot of merit to any mechanism that allocates scarce things to those who need them the most. (If you'd like to propose a better system that doesn't have worse flaws, I'm all ears.)
How about stores putting up signs saying something like "We are temporarily increasing prices because of supply shortages. The higher prices are to discourage unnecessary purchases so that some product remains for those that need it the most."
"are willing to afford" is not equal to "really need" (as opposed to "they say they need it"). Maybe. I tend to believe it is but, in any case, can you think of a better alternative?
Forming a ten member "Committee for the Fair Allocation of Resources to Those in Most Need" (the CFARTMiN) with 5 of the members elected by the labor unions and the other 5 by the US Senate (and proposed by the POTUS) is a horrible alternative (as we know from experience).
And I don't think Bryan argument is that this is a "perfect" solution. Only that it is the best one available. Far better than government intervention thru anti-gouging laws, price controls or centralized distribution. All of them fails the limus test you are proposing both in the short term and, even much more, in the medium-long term.
Practically speaking, I don't know if sellers can actually raise prices to effectively prevent shortages. What are they going to do, up the unit price by five cents every hour until there's a better equilibrium? They could raise the price by ten dollars all at once, in which case there would be no shortage, and also no revenue. (My hypothetical prices assume low cost goods; just multiply by 10 or 100 for more expensive stuff.) I don't think most businesses are interested in optimizing pricing strategies to prevent shortages, because more optimization takes work, which costs money. How can you tell if you will be more profitable vs. the status quo(especially if you assume the "supply chain issues" will be temporary)?
I'll guess you've never run a successful business. Part of running one is pricing. You don't have to get it exactly right - if you price too low, you'll sell out faster than you want. If you price too high, you won't sell much at all. So you watch the market and adjust. It's not difficult or expensive to do.
I'm not talking about regular market pricing, I'm talking about pricing to avoid shortages due to supply chain problems. Suppose a store has five refrigerators in stock, and the next refrigerator shipment is five weeks away. If we assume that shipments will resume as normal in five weeks(no more delays), how much do you raise the price on refrigerators? Are you trying to sell one per week, so the last one sells right when the new one arrives? Maybe you want them to sell slower, so you always have one in stock. I don't think anyone cares about these questions, because they just use the systems already in place and expect things to go back to normal. If that means some customers have to wait two weeks for a new refrigerator, whatever, the store makes its money and doesn't have to worry about being undercut by a competitor.
Interestingly enough, the prices do increase in response to shortages, but *only on Ebay*. When there is a shortage, you can almost always buy the product (new, in original unopened packaging), but only on Ebay, where apparently the rules of fairness do not work.
This means that extra money that the manufacturers could have earned and used for expanding the production capabilities, are actually going to scalpers.
I'm just a weirdo and cannot fathom why a human would so staunchly oppose another human controlling their property as they see fit. Such disgusting arrogance.
What is rhetorically effective when you can get the other party to listen attentively to you for five minutes may not be rhetorically effective when you have only a few seconds to make your case. In the most superficial view, “It’s OK to raise prices if there’s a shortage” doesn’t sound good; I don’t think you or anyone else can sell it to the public. Atavistic fairness norms are too deeply ingrained.
I recall when rice and pasta was temporarily limited to two items per person back in 2020 and I argued that raising prices would be a better move, but it's hard to imagine how more of those things could be produced to fill the demand given the short time-frame, and to my knowledge most people adhered to the rules. Is there a big benefit to the floating price approach that would be salient to people who despise 'price gouging'?
I haven't seen a ton of examples of goods shortages in anything but the short term. Price increases seem ubiquitous. This doesn't seem like a huge problem.
The two long running shortages I've seen are labor and long lead time durable goods (like computer chips). Production of which can't be spun up quickly at any price and are sticky.
When demand exceeds supply, prices increase, which incentivise others to increase supply to get in on the action which brings prices to normal again. When this works, everyone is better off. I mostly accept this argument.
But during our current issues it's not really like that, because the whole thing is caused by the fact that supply *cannot* be increased. So raising prices does not make things better for everyone. In fact, the vendor doesn't earn any more profits because their increased profit per item is negated by the fact that they don't sell as many. The rich get what they want, but at a higher price, and the poor don't get what they want, and have the added resentment of knowing the rich win again. I really don't see how this could be considered anywhere close to an optimal solution
"The rich get what they want, but at a higher price, and the poor don't get what they want", the "rich" get what they are willing to pay for and the "poor" don't get what they are not willing to pay for (before enjoying social desirability bias and virtue signaling, consider the fact that households in the UK spend more in beer at the local pub than in energy to heat their houses).
Why this system is more unfair than "the ones getting in line first getting what they want and the ones (maybe too busy producing things) not getting in line not getting what they want". Or than "the ones that a committee of wise men judging the needs of others, label as "most in need" getting what they want". Do you truly believe in the "fairness" of committes of wise "elected" men/women?
And, of course, producing (or having produced) goods and services that other people value more than their money, is a great way of "establishing" who can have more "consumption power". It is not only "fair" by many definitions. It is, most than any other thing, extremely useful for the wellbeing of everybody.
“Willingness to phone lots of shops” correlates better with need than “willingness to pay lots of money”.
The truckers and tradies who need RAT tests to work will give up their weekend for it. That sucks and it penalises them harshly, but probably not that much more than the cost of the RAT tests if there was no price cap.
You don’t need a central committee (except maybe for a copay on freight costs), shops will bid higher prices to drug companies so they can attract traffic to their stores.
Raising prices during a shortage is called "Price Gouging" and is considered deeply immoral by most. In serious cases, it's seen as exploiting people in an emergency.
So I'm deeply sceptical this rhetorical device would have much si=uccess.
Good piece. A few years back, I got mostly roasted for posting on Facebook that the Covid vaccine should be sold at market prices. This was right after the vaccines came out in December 2020. I did say Medicare should arrange a bulk purchase in such a situation.
Bryan and everyone, what do you think? I’m not sure I was right.
One of the things that has made the US such a wealthy country is a business culture that includes the idea of a “fair price”. Although it’s generally legal to charge any price the market will bear – even taking advantage of buyer ignorance or desperation – mainstream American culture supports the notion that there is a “fair price” – *the price that an informed buyer would pay in a competitive market, considering circumstances of location, quality, convenience, etc.*
So, for example, Americans frown upon selling generators for $10,000 during a blackout, if they go for $1000 at normal times. Or the rural tow truck driver who wants $2000, cash, to pull your car out of the muck, just because the next closest tow truck is hours away.
Many economists wouldn’t have a problem with that – in a certain narrow sense, those kinds of price spikes (“gouging”, if you like) may be efficient. But a society in which most sellers feel revulsion toward “taking advantage” is one in which buyers are more willing to engage in transactions. If buyers feel they’re unlikely to get screwed because of their ignorance (as in the the case of AT&T here) or desperate circumstances, then there is more commerce and less effort expended in investigation of deals and precaution against getting caught by local monopolists. In short, transaction costs are lower for everyone.
I’m not advocating legislation here. But the American attitude has it merits.
This is a very valid idea: volatility in prices (not only "gouging") increases transaction costs and by doing so, reduces the size of the economy. There is some merit to it.
Accepting this idea (that there is a gain in efficiency with volatile prices but a lost in market size) means that the next question is: who should be responsible for doing this cost-benefit analysis.
"Politicians" is, very likely, the worst possible answer since they have the wrong set of incentives: they don't get more money from more efficient markets and don't lose money in a smaller economy. "Cultural norms" is also, very unlikely, the answer: transaction costs evolve at a very high pace afterall. "Sellers" are in a better position to take into account this potential trade-off.
So, even accepting your point, willing sellers and willing buyers would be the best positioned to fix prices at the "best level" (from the point of view of the global economy), even taking into account the possible increase in transaction costs.
In other words: market prices already incorporate the potential effect on aggregate demand of volatile prices due to the increase in transaction costs.
I agree. I'm just saying that a cultural norm that makes sellers moderate price spikes has some value for society. The wealthiest countries in the world all seem to have that norm.
"The wealthiest countries in the world all seem to have that norm."
That's, very likely, because "norm writing" respond to "public choice kind of incentives" and not to "economy efficiency".
Those countries you refer to are wealthier despite having that norms (not because they have them). Caplan's point is that they would be even wealthier without it. And it is plausible.
If employers are unwilling to sell goods above the arbitrarily defined ‘fair price’ then that would *reduce* the amount of commerce and make society poorer.
The most likely reason why a business would be reluctant to se at a high enough price to reap a large profit is probably mainly because, regardless of how ignorant his customer is, his competitor will be willing to undersell him. I see no reason why the notion of ‘fair prices’ has anything positive to contribute to society.
I like this idea but can it truly be said to be 'American'? Is there evidence this norm is more common in the US than elsewhere and then that it makes a contribution to prosperity that you argue it does?
I think the concept of a "fair price" is just a corollary of the fundamental instinct toward fairness that is tested in the classic ultimatum game (https://en.wikipedia.org/wiki/Ultimatum_game).
There are cultural differences in how people play the game - notably, "proposers and responders from WEIRD (Western, educated, industrialized, rich, democratic) societies are most likely to settle on equal splits." So I suspect this interpretation of fairness is a Western concept, not an American one.
As one more point in favor, the Wikipedia article for "price gouging" includes sections describing laws in the US, the UK, and the EU (https://en.wikipedia.org/wiki/Price_gouging), but no other countries.
"Why should products just go to the lucky and well-connected?" A typical response is, "Why should products just go to the rich?" A complex debate ensues. Your rhetorically palatable exception not so palatable any more. Instead you need a rhetorically palatable rejoinder to that response.
The answer is that they don't go to the rich. Everyone just uses less, so there's no shortage.
The price system is also the only system that can efficiently allocate by need. You couldn't line up every person in every store for every product and objectively judge who needs it most.
"Why should products just go to the rich?" (First a clarification: they are not going to the rich, they are going to the people willing to pay the clearing price. Which can or cannot be richer)
But even assuming your wording: because that "system", allocating the products to the people willing to pay the clearing price / the rich", incentive production of the scarce good and the development of substitutes and moderate consumption or redirect it to a substitute.
Everybody (the willing to pay and the not willing to pay) are then better served than using "lucky" or "well connected" allocation.
This "result" is so clear empirically that the need of keeping explaining it is just unbelievable.
That absolutely works over the medium-to-long run.
But the classic example is bottled water after a hurricane. During the immediate post-hurricane aftermath, no matter how much the price of bottled water rises, no one is going to find a way to bring appreciable amounts of bottled water in. But by a week later, municipal water will be working just fine, and there's no need to incentivize more of the short-term shipping (particularly if it will interfere with other short-term use of the roads, perhaps by the utility crews working to restore municipal water).
In this sort of short-term crisis, it's really not clear that allowing prices to float improves the supply in any non-negligible way - it just changes distributional features so that it's the people with more cash to spare that get it. Of course, it's better not to just continue to sell it at the old cheap price during that period so that it's just the people who happen to be free to get to the store when the storm immediately clears - it's likely better if this short-term supply is allocated in some sort of more centralized way.
Or at least, you can't use any sort of equilibrium argument to argue that this isn't better, because this sort of short-term situation exists entirely out of equilibrium.
"it's likely better if this short-term supply is allocated in some sort of more centralized way."
And this is just because you are imagining "ideal centralized ways of allocate" the product ("allocation by all knowing angels", very likely). It would be great if you can explain, with some detail, which precise "centralized way of allocate the product" you have in mind.
There are so many devils in that detail!!
"During the immediate post-hurricane aftermath, no matter how much the price of bottled water rises, no one is going to find a way to bring appreciable amounts of bottled water in." This is false. A straightforward business model would be to look at where hurricanes are predicted to hit, and in the week beforehand rent some local short-term warehouse storage and fill it with bottled water. Then, once the hurricane hits, you already have all the supply you need. Of course this is a *much* more expensive supply chain than just-in-time deliveries to the grocery store, but if customers were willing to pay the increased price it could certainly be done.
Obviously, market prices don't work when there are no markets (as it is the case in the first week after a hurricane).
But if your argument is that since markets don't work in the first week after a major hurricane we have to resort to "central allocation" after any supply chain issue (like a pandemic or a war in Europe), I don't get it.
As far as markets keep working, they provide the best pricing signal available. If markets are shoot down (by any reason) obviously they cannot be used to this purpose and we will have to resort to the second best alternative available (which will be, in any case, worse that having well functioning price setting markets)
I don't make the argument in the second paragraph, that since markets don't work in a true short-term crisis, they therefore shouldn't be used in a longer-term supply-chain issue like a pandemic or war.
But I think that the original post here, and most of the comments, just glide right over the problems of true short-term crisis, and pretend they don't exist, when these are the most salient examples of "price gouging" that non-economists think of. If you want to get past those impressions, then it's important to specifically address the comparison and try to outline some criteria that importantly distinguish them.
"During this lumber shortage/chip shortage/gas shortage, I want to reward the businesses and entrepreneurs that are doing the hard work of bringing extra supply to market, so that you, the customers, can have them. I will pay them extra for that service, and to save quantity for those who need it most, I will be temporarily raising prices for customers as well. Let us hope that they get supply up to good amounts soon so that we can get back to the old prices."
"These are the most salient examples of "price gouging" that non-economists think of."
The most salient examples of price gouging for non-economist are, for instance, gas in Europe in March, -April 2022 or toilet paper in March 2020 or generators BEFORE a hurricane ... in all these examples markets prices do the most efficient job allocating the scarce products.
[In some of the examples, like generators in a hurricane, is relevant to take into account that these are not unique events. Once you "play" them once a year in the same areas the logic of markets works perfectly well in these cases too]
If you can find situations in which: a) markets keep working and b) they are not the best solution to allocate the products, please let me know. I can't find any.
And if they do exist, I am pretty sure they are irrelevant to the general argument that you summarized so well in your last paragraph. Except for the last sentence. I don't see any reason why the "old prices" have to be better that the "new ones". That looks to me as "status quo bias": if prices never get back to the previous levels it should be because productive resources are better allocated now.
[i.e.: the world is, very likely, a better place with Russia and the Russian gas commercially isolated from the rest of the world forever]
Jose, you seem to be committing the 'econ101' fallacy, which is to assume that simply economic laws work in all cases at all timescales. I'm sure you didn't intend it? Markets only balance themselves as you describe for *most things* under *long time scales*.
Free markets are always balanced
I don't think your substitution argument works in the current context of a GLOBAL supply shortage. And moderation does not really work for goods we need, like toilet paper, PPE etc. So there are plent of cases where your argument fails to hold.
Why shouldn't work in a GLOBAL (whatever it means) supply shortage? Which of the premises or mechanism does not hold because of the "Global" nature of the shortage?
Well, you would be amazed of your "efficiency improvements" in a $1,000 toilet paper rolls scenario!!
Products in shortage, sold at market prices, don't necessarily go to the rich. They go to whoever is willing to pay the most. In other words, to those most desperate for the product. Sometimes those will be rich people, often not (rich people don't like wasting their money either).
There's a lot of merit to any mechanism that allocates scarce things to those who need them the most. (If you'd like to propose a better system that doesn't have worse flaws, I'm all ears.)
How about stores putting up signs saying something like "We are temporarily increasing prices because of supply shortages. The higher prices are to discourage unnecessary purchases so that some product remains for those that need it the most."
Need most is not necessary equal to can afford
"are willing to afford" is not equal to "really need" (as opposed to "they say they need it"). Maybe. I tend to believe it is but, in any case, can you think of a better alternative?
Forming a ten member "Committee for the Fair Allocation of Resources to Those in Most Need" (the CFARTMiN) with 5 of the members elected by the labor unions and the other 5 by the US Senate (and proposed by the POTUS) is a horrible alternative (as we know from experience).
And I don't think Bryan argument is that this is a "perfect" solution. Only that it is the best one available. Far better than government intervention thru anti-gouging laws, price controls or centralized distribution. All of them fails the limus test you are proposing both in the short term and, even much more, in the medium-long term.
Practically speaking, I don't know if sellers can actually raise prices to effectively prevent shortages. What are they going to do, up the unit price by five cents every hour until there's a better equilibrium? They could raise the price by ten dollars all at once, in which case there would be no shortage, and also no revenue. (My hypothetical prices assume low cost goods; just multiply by 10 or 100 for more expensive stuff.) I don't think most businesses are interested in optimizing pricing strategies to prevent shortages, because more optimization takes work, which costs money. How can you tell if you will be more profitable vs. the status quo(especially if you assume the "supply chain issues" will be temporary)?
Dutch auction would work. Or even better, a Vickrey auction.
I'll guess you've never run a successful business. Part of running one is pricing. You don't have to get it exactly right - if you price too low, you'll sell out faster than you want. If you price too high, you won't sell much at all. So you watch the market and adjust. It's not difficult or expensive to do.
I'm not talking about regular market pricing, I'm talking about pricing to avoid shortages due to supply chain problems. Suppose a store has five refrigerators in stock, and the next refrigerator shipment is five weeks away. If we assume that shipments will resume as normal in five weeks(no more delays), how much do you raise the price on refrigerators? Are you trying to sell one per week, so the last one sells right when the new one arrives? Maybe you want them to sell slower, so you always have one in stock. I don't think anyone cares about these questions, because they just use the systems already in place and expect things to go back to normal. If that means some customers have to wait two weeks for a new refrigerator, whatever, the store makes its money and doesn't have to worry about being undercut by a competitor.
Interestingly enough, the prices do increase in response to shortages, but *only on Ebay*. When there is a shortage, you can almost always buy the product (new, in original unopened packaging), but only on Ebay, where apparently the rules of fairness do not work.
This means that extra money that the manufacturers could have earned and used for expanding the production capabilities, are actually going to scalpers.
I'm just a weirdo and cannot fathom why a human would so staunchly oppose another human controlling their property as they see fit. Such disgusting arrogance.
What is rhetorically effective when you can get the other party to listen attentively to you for five minutes may not be rhetorically effective when you have only a few seconds to make your case. In the most superficial view, “It’s OK to raise prices if there’s a shortage” doesn’t sound good; I don’t think you or anyone else can sell it to the public. Atavistic fairness norms are too deeply ingrained.
I think you need a public choice explanation of the "fairness" pricing norm to solve it.
I recall when rice and pasta was temporarily limited to two items per person back in 2020 and I argued that raising prices would be a better move, but it's hard to imagine how more of those things could be produced to fill the demand given the short time-frame, and to my knowledge most people adhered to the rules. Is there a big benefit to the floating price approach that would be salient to people who despise 'price gouging'?
I'd phrase it as "shortages are less fair than raising prices"
I haven't seen a ton of examples of goods shortages in anything but the short term. Price increases seem ubiquitous. This doesn't seem like a huge problem.
The two long running shortages I've seen are labor and long lead time durable goods (like computer chips). Production of which can't be spun up quickly at any price and are sticky.
I didn't find this convincing at all.
When demand exceeds supply, prices increase, which incentivise others to increase supply to get in on the action which brings prices to normal again. When this works, everyone is better off. I mostly accept this argument.
But during our current issues it's not really like that, because the whole thing is caused by the fact that supply *cannot* be increased. So raising prices does not make things better for everyone. In fact, the vendor doesn't earn any more profits because their increased profit per item is negated by the fact that they don't sell as many. The rich get what they want, but at a higher price, and the poor don't get what they want, and have the added resentment of knowing the rich win again. I really don't see how this could be considered anywhere close to an optimal solution
"The rich get what they want, but at a higher price, and the poor don't get what they want", the "rich" get what they are willing to pay for and the "poor" don't get what they are not willing to pay for (before enjoying social desirability bias and virtue signaling, consider the fact that households in the UK spend more in beer at the local pub than in energy to heat their houses).
Why this system is more unfair than "the ones getting in line first getting what they want and the ones (maybe too busy producing things) not getting in line not getting what they want". Or than "the ones that a committee of wise men judging the needs of others, label as "most in need" getting what they want". Do you truly believe in the "fairness" of committes of wise "elected" men/women?
And, of course, producing (or having produced) goods and services that other people value more than their money, is a great way of "establishing" who can have more "consumption power". It is not only "fair" by many definitions. It is, most than any other thing, extremely useful for the wellbeing of everybody.
Incentives matter. Like a lot.
“Willingness to phone lots of shops” correlates better with need than “willingness to pay lots of money”.
The truckers and tradies who need RAT tests to work will give up their weekend for it. That sucks and it penalises them harshly, but probably not that much more than the cost of the RAT tests if there was no price cap.
You don’t need a central committee (except maybe for a copay on freight costs), shops will bid higher prices to drug companies so they can attract traffic to their stores.
Raising prices during a shortage is called "Price Gouging" and is considered deeply immoral by most. In serious cases, it's seen as exploiting people in an emergency.
So I'm deeply sceptical this rhetorical device would have much si=uccess.
Good piece. A few years back, I got mostly roasted for posting on Facebook that the Covid vaccine should be sold at market prices. This was right after the vaccines came out in December 2020. I did say Medicare should arrange a bulk purchase in such a situation.
Bryan and everyone, what do you think? I’m not sure I was right.
Missing words ("if it"): "Why is this likely to be highly effective is adopted? "
From **AT&T’s roaming fees and the American Way** (my blog, https://mugwumpery.com/?p=208 )
One of the things that has made the US such a wealthy country is a business culture that includes the idea of a “fair price”. Although it’s generally legal to charge any price the market will bear – even taking advantage of buyer ignorance or desperation – mainstream American culture supports the notion that there is a “fair price” – *the price that an informed buyer would pay in a competitive market, considering circumstances of location, quality, convenience, etc.*
So, for example, Americans frown upon selling generators for $10,000 during a blackout, if they go for $1000 at normal times. Or the rural tow truck driver who wants $2000, cash, to pull your car out of the muck, just because the next closest tow truck is hours away.
Many economists wouldn’t have a problem with that – in a certain narrow sense, those kinds of price spikes (“gouging”, if you like) may be efficient. But a society in which most sellers feel revulsion toward “taking advantage” is one in which buyers are more willing to engage in transactions. If buyers feel they’re unlikely to get screwed because of their ignorance (as in the the case of AT&T here) or desperate circumstances, then there is more commerce and less effort expended in investigation of deals and precaution against getting caught by local monopolists. In short, transaction costs are lower for everyone.
I’m not advocating legislation here. But the American attitude has it merits.
This is a very valid idea: volatility in prices (not only "gouging") increases transaction costs and by doing so, reduces the size of the economy. There is some merit to it.
Accepting this idea (that there is a gain in efficiency with volatile prices but a lost in market size) means that the next question is: who should be responsible for doing this cost-benefit analysis.
"Politicians" is, very likely, the worst possible answer since they have the wrong set of incentives: they don't get more money from more efficient markets and don't lose money in a smaller economy. "Cultural norms" is also, very unlikely, the answer: transaction costs evolve at a very high pace afterall. "Sellers" are in a better position to take into account this potential trade-off.
So, even accepting your point, willing sellers and willing buyers would be the best positioned to fix prices at the "best level" (from the point of view of the global economy), even taking into account the possible increase in transaction costs.
In other words: market prices already incorporate the potential effect on aggregate demand of volatile prices due to the increase in transaction costs.
I agree. I'm just saying that a cultural norm that makes sellers moderate price spikes has some value for society. The wealthiest countries in the world all seem to have that norm.
"The wealthiest countries in the world all seem to have that norm."
That's, very likely, because "norm writing" respond to "public choice kind of incentives" and not to "economy efficiency".
Those countries you refer to are wealthier despite having that norms (not because they have them). Caplan's point is that they would be even wealthier without it. And it is plausible.
If employers are unwilling to sell goods above the arbitrarily defined ‘fair price’ then that would *reduce* the amount of commerce and make society poorer.
The most likely reason why a business would be reluctant to se at a high enough price to reap a large profit is probably mainly because, regardless of how ignorant his customer is, his competitor will be willing to undersell him. I see no reason why the notion of ‘fair prices’ has anything positive to contribute to society.
I like this idea but can it truly be said to be 'American'? Is there evidence this norm is more common in the US than elsewhere and then that it makes a contribution to prosperity that you argue it does?
I think the concept of a "fair price" is just a corollary of the fundamental instinct toward fairness that is tested in the classic ultimatum game (https://en.wikipedia.org/wiki/Ultimatum_game).
There are cultural differences in how people play the game - notably, "proposers and responders from WEIRD (Western, educated, industrialized, rich, democratic) societies are most likely to settle on equal splits." So I suspect this interpretation of fairness is a Western concept, not an American one.
As one more point in favor, the Wikipedia article for "price gouging" includes sections describing laws in the US, the UK, and the EU (https://en.wikipedia.org/wiki/Price_gouging), but no other countries.