Market Power

Musings by an academic economist on the power of markets and the power over markets.

Monday, December 27, 2004

Don Boudreaux on Price Gouging

Don Boudreaux of Cafe Hayek has an excellent post today on price gouging. Writing on the inevitable claims of price gouging that will come from the countries ravaged by yesterday's horrible tsunamis in the Indian Ocean, Professor Boudreaux wonders if poor people are helped by price controls designed to lower the prices of goods. Not likely, he argues.

When natural disasters, especially disasters like tsunamis and hurricans which cause widespread damage, prices of construction materials are going to rise because there is a big increase in demand for these goods and services as well as a decrease in their supply. The result in a well-functioning market is an increase in the price of the goods. People often worry about the effect these price increases will have on poor people. If poor people were less likely to be able to afford construction materials at their usual price, they are going to be even less likely to be able to afford them now. Therefore, the argument goes, the prices need to be kept low and various forms of political pressure get applied to keep prices low. Unfortunately, these artifical prices have the effect of causing shortages of the goods - a greater amount is demanded than is supplied, meaning some have to do without.

How does the unmet demand get cleared? Through rationing schemes where people get around the low legal price in various ways. For example, people can be forced to wait in line to acquire the good (they pay the low price PLUS they have to give up some valuable time), black markets can develop (where goods get traded at a high ILLEGAL price), government can ration the good (which won't have much of an effect if it can't prohibit resale - those with high valuation of the good buy from those with low valuation who were lucky enough to get the good), those who want the good can bribe those who possess the good (people pay the low price of the good PLUS a bribe), etc. The goods still get exchanged, and those who acquire the goods are those who have the resources necessary to operate within these rationing schemes.

Does a poor person who doesn't have the requisite resources to buy at a high legal price have the requisite resources to acquire the same goods through some other rationing scheme? Probably not.