All told, it is cheaper to surge price than have consumers worry and waste the most precious and depleting commodity of all, a person’s time.
The free market is needed even more in an emergency than in normal times. In the current Pandemic, a run on toilet paper and paper towels occurred as consumers stocked up in the fear that shortages would persist. Back in the 1970s, gasoline and other petroleum products, underpriced by federal law, caused shortages where consumers repeatedly topped off their tanks in long gasoline lines at the service station.
Surge pricing (the proper term for ‘price gouging’) is needed from time to time to save consumers from themselves. Increasing prices to the point that consumers know that there will be supply at the store prevents panic buying, not to mention the worry and lost time hunting for uncertain supply.
And why not let the store bear high inventory, not the consumer?
All told, it is cheaper to surge price than have consumers worry and waste the most precious and depleting commodity of all, a person’s time.
Economist Raymond Niles last month organized a petition to legalize surge pricing. I was happy to join (#81) as one of more than 175 economists (and counting) in support.
The petition follows:
We, the undersigned economists, implore the governors and legislatures of the 36 states with anti-price gouging laws to repeal or temporarily suspend them during this coronavirus emergency.
All of these laws are a form of price control, and they cause the shortages of the very products that can ensure our health and survival during this coronavirus epidemic, such as masks, sanitizers, gloves, testing kits, and other essential medical, hygiene, and food supplies.
Doctors and hospitals are having difficulty getting enough masks and gloves. And these shortages are spreading. Entire sections of grocery stores are being cleaned out as people panic-buy for fear of new shortages. Even toilet paper cannot be found in many stores!
None of this had to happen, and it can still end with vital medical supplies and abundance returning to the stores, if elected officials do one thing: repeal or, at a minimum, temporarily suspend the anti-price gouging laws.
The anti-price gouging laws interfere with the working of the most fundamental principle in economics: the Law of Supply and Demand. This Law holds that when market prices are free to adjust to reflect changes in supply and demand conditions, markets will clear; there will be no shortages (or if one temporarily arises, it will quickly subside).
This is a basic principle learned in any introductory economics class, yet it is a lesson forgotten in statehouses and courtrooms and homes and businesses across the country.
Americans need to accept that market prices reflect actual supply and demand conditions, conditions that cannot be wished away by legislating “fair” prices. When market prices spike higher, it is because there is a greater scarcity of the product in question. This is what happened when, at first, just N-95 face masks began to run out. In the first days of the epidemic, demand spiked for these face masks, but merchants could not raise prices in response, which would have controlled the quantities demanded so that they would match available supplies. Instead, they ran out of masks.
An even greater tragedy occurred on the supply side. Higher prices — which were forbidden by the anti-price gouging laws — would have increased the supply of these life-saving goods by signaling to manufacturers higher profits from making these goods. This means that factories could afford to bring on the extra shifts, hire more trucks, pay more for scarce supplies — do all that it takes to meet the extra demand.
Which is better, temporarily higher prices and a greater supply of masks and the other life-saving goods, or being “protected” from “gougers” and having none of these goods at all? That is the choice we face.
We beseech you to repeal or suspend the anti-price gouging laws in this time of emergency. Unleash the power of the market. Our very lives depend on it!
——————–
Raymond C. Niles, Senior Fellow the American Institute for Economic Research (AIER), is Assistant Professor of Economics & Management at DePauw University. He holds a PhD in Economics from George Mason University and an MBA in Finance & Economics from the Leonard N. Stern School of Business at New York University.
Prior to his career in academia, Niles worked for 15 years on Wall Street as a senior equity research analyst at Citigroup, Schroders, and Goldman Sachs, and as managing partner of a hedge fund investing in energy securities.
Thank you for the call-out, Rob!
Two excellent points: Surge pricing saves the most precious commodity of all, a person’s time. Think of the hours spent in lines today at stores and the even more hours spent in line in the 1970s to buy gas, where people waited so long in the mile-long lines that their cars ran out of gas… while waiting for gas!
Also, I agree completely that “surge pricing” is a much better term than the pejorative “price gouging.” Surge pricing, or emergency pricing, is good for all of the reasons we describe. “Gouging” is a pejorative term that calls on emotional antipathy to high prices that gets in the way of understanding their beneficial economic function.
Thanks for your good work!
[…] imparted below can be applied to surge pricing (“price gouging”), the subject of this post last week at […]