In the first part, you’re saying that price limits have the same intent as withdrawal limits, rationing and so on: to prevent panic and speculation. That’s true, but it doesn’t matter if the result of price limits is different: empty shelves and not much else. That’s what the econ folks have been saying.
Triple prices or empty shelves is a false dichotomy.
Everyone gets the supply and demand curve. That’s not the point. Society exists to counter-balance natural bad luck not to amplify it. Social policies that make a disaster even more disastrous for an individual are going to produce rage. Your house got flooded, you have no heat or electricity, you really need some oil for your generator and now that oil is 10 times more expensive.
I get that price signals are a good way to coordinate everyone in a community consuming less of a good, but people will fundamentally dislike it because it makes a bad situation worse for an individual.
Also the actual reasons economists are against price gouging are hilariously theoretical universe of frictionless spheres type arguments. Supply chains can take ages to react to price changes even in situations where there is no government boogie man tweaking things. Just look at the microchip supply crisis.
The actual solution to these issues is having effective emergency supply delivery handled by the government. The whole price gouging conversation is societal bike shedding. Modern governments can and do provide emergency aid almost in real time as disasters happen. If X developed world government lacks that capability, smack’em at the ballot box and tell the next crew to copy whatever the other dozens of countries are successfully doing in that department.
The point economists make is that, on the contrary, price gouging does not “make a disaster even more disastrous,” and instead makes a disaster more likely to be addressed quickly.
Consider the case of a sudden positive demand shock (COVID toilet paper) - this is not a disaster that is causing individual-level suffering through paying exorbitant prices. Where this causes problems is when people can’t get the item. The best way to nip this herding behavior in the bud is to make it costly. Then people for whom the product provides a lot of value will still buy it while those marginal people will think twice and leave it on the shelf. As demand normalizes, prices can come down. This also encourages those “clowns” in Tennessee to buy up hand sanitizer and ship it at great expense to LA to resell it there for high-but-lower-than-without-this-supply prices. In this case, prices still do a great job of ordering preferences and delivering good outcomes, so no wonder pro- and anti-gougers don’t usually talk about it.
Now consider the case of a sudden negative supply shock (hurricane knocks out a pipeline) - this IS a disaster that is causing individual-level suffering through paying exorbitant prices, but in a shortage like this, what alternative allocation mechanisms exist that could enable people to get the product, and ideally more to the people who have more valuable uses for it? Rationing is one—you can only get X amount of the product and then you’re kicked from the market; when there is use-value variability, this is problematic as it means carving out exceptions to the rule (ambulance services get dibs on gas, do nurses trying to get to work also get dibs?). Another is to have the government ship in a bunch from elsewhere so prices don’t need to rise, but has the catch that it’s basically an implicit subsidy...for this specific group of people at this specific time in this specific place. That’s great on humanitarian grounds and helps spread the cost to the rich (who pay most of the income taxes), but if “just ship in more” is viable, this could also be done by the private sector, so why would we prefer the government to do this? One reason is that the private sector needs a price signal to act; reporting of stockouts is not as compelling to those inhumane businesses, but such wails would not be ignored by the government. In an extremely fast knockout of supply, potentially the government response would be better from a welfare/inequality standpoint—the extra supply will be on the way in X time regardless, so in the meantime, keep selling at low prices so poor people don’t have to pay the high prices. Except there are already stockouts, so this benefit won’t materialize because you can’t sell nonexistent product. In the situation that inventory is starting to move quickly, hiking prices helps slow that to buy supply chain time and also sends a signal out that there is opportunity (or to the government: that there is evil afoot), which draws in extra supply. The supposed benefits of government action in either case are missing. While prices don’t do as good of a job of ordering preferences here (which is why we don’t like them: https://journals.sagepub.com/doi/abs/10.1177/00222429211012107 ; though there are still some preferences to be ordered during stockouts [e.g., ambulances] and prior to stockouts [e.g., the person who needs gas in their generator TODAY vs. the person who wants some back-up gas]), they do everything else we want. In the extreme circumstance where the supply constraints aren’t local but all the way up the chain (chip shortage), it’s again not clear how government taking over sourcing will help, unless there really is a severe coordination issue at the top (government can obviously help when it controls import/export) or this constituency is not of concern to many except the government (sure, society, you want your [insert product] even though these people are suffering and won’t retool your resource allocation, so we are purchasing (gasp, a price signal)/commandeering (tyranny?) this factory for [insert government’s desire that aligns with the affected constituency]).
If you throw out supply and demand, which are the main drivers of prices, and say that they’re not the point, of course economists will look tangential. There are definitely some specific cases where you can think the price mechanism won’t “work” for us, but they are the exceptions, not the rule.
Consider the case of a sudden positive demand shock (COVID toilet paper) - this is not a disaster that is causing individual-level suffering through paying exorbitant prices. Where this causes problems is when people can’t get the item. The best way to nip this herding behavior in the bud is to make it costly. Then people for whom the product provides a lot of value will still buy it while those marginal people will think twice and leave it on the shelf. As demand normalizes, prices can come down.
The market can stay irrational longer than your bum can stay free of shit.
If people hoard toilet paper, expecting to sell it at prices higher than the market will actually bear, at some point they’re going to discover that they overspent. They may even go bankrupt. But in the meantime, nobody had any toilet paper. And then, if the toilet paper price doesn’t go up like they anticipated, they may just destroy their stock of toilet paper because the transaction costs of selling it at the market price outweigh the profits of doing so.
The market punishes irrational people, but that doesn’t mean you get no irrational people. You get a steady stream of them, each of whom causes some damage in the process of being punished by the market.
I don’t see how. Maybe you can hoard without consequence but you also remove a major reason to hoard. The two reasons to hoard are either for personal consumption, or for resale.
For personal consumption: For people inclined to hoard it’s hard to see how “I’d better buy it now because they might be out later” is likely to induce a lot more hoarding than “I’d better buy it now because it might only be available for an unaffordable price later.”
For resale: This is the kicker and this is Jiro’s point—people get the idea “I’ll buy TP now before those rubes, then when its out everywhere I can resell for higher.” If its illegal to resell for higher then this excess TP is not hoarded because there’s no incentive to do so—people know approximately how much TP they actually need for personal use and there wouldn’t be much incentive to buy more. This is even more pronounced for durable goods like snow shovels, you only can use one shovel at a time but you could imagine yourself able to re-sell an unbounded number of snow shovels.
I think the gods-eye optimal solution would be something like allowance of price increases for people who are bringing goods in from outside and a ban on speculation. But in the real world it’s really hard to differentiate speculation from “legitimate” buying and selling, and, maybe it’s wrong or maybe it’s right, but it’s definitely not crazy to think that the net effect of second-order speculation induced shortages is worse than the net effect of first-order disaster induced shortages.
To treacherously switch sides to the pro-price gouging side:
The obvious solution is for shops to jack up prices as soon as an emergency situation occurs, thereby taking the wind out of speculators’ sails. Now businesses are not going to want to do this, since it’ll ruin their reputation with customers for minor short term gain.
So the actual solution is for the government to mandate price-gouging in emergency situations, this way businesses can do it, without having to bear the public opinion penalty.
If an area is declared a public disaster area, all shops are obligated to immediately implement scarcity prices. Scarcity prices work like this: as the stock of an item goes down, the price goes up by 100% of base cost for every 1% of missing stock. So by the time you only have 90% of toilet paper left in store, you’re already paying 10 * base cost for it.
Of course private citizens are also allowed to come in and sell whatever they want.
I’m not sure what incentive this creates for shop owners, like maybe they want to not bring stocks back up to normal, but whatever, I’m sure it’ll work out.
Modern society gives people too much incentive to live in floodable/hurricanable/earthquakable areas anyway, a bit more spice in their lives would shift populations to more reasonable regions to live in so it’s all good either way.
At best, this would only make sense if everyone had the same amount of money. They don’t. Mandatory price-gouging would mean the poor get screwed over.
Far better to have normal prices and mandatory purchase limits.
There’s a strain of thought that would say price allocation of society’s production itself is only ethical when everyone has the same amount of money, but that’s a whole other can of worms.
Actually, if you mandate normal prices (and often if you don’t, but the companies don’t want to lose customer goodwill) the companies will institute purchase limits on their own.
In other words, you’ve effectively argued for existing anti-gouging laws.
For personal consumption: if prices are ceilinged to be low, “might be out later” becomes “might be out sooner,” which makes getting to the store quickly more imperative, and not just for the hoarding-inclined but also the marginally-hoarding-inclined and maybe even the people who just heard something on the news.
For resale: Indeed, there is a weaker incentive to hoard at low present prices if near-future prices are capped. But costs are also part of that equation, and you can weaken the incentive power of high near-future prices by bringing those prices into the present and squeezing any potential margin that way. I’ll buy $1000 of TP today to sell for $2000 within 7 days, but would I pay $1500 for the same amount of TP today? First, if I expect $2000 to be the price, my margin is lower. Second, my expectations of continued price increases are dampened (I know I’m on the clock here because this price impulse won’t last forever), so maybe it won’t even get to $2000. Third, now I have more uncertainty about my time window. This is a ton more risk for me and maybe I’ll just put it in an index fund (lol).
Notice that in the price ceiling situation you can reduce the resale incentive but increase the personal consumption motivation whereas if you let prices rise, you reduce both the resale incentive and the personal consumption motivation. You also get the benefit, if it isn’t a closed economy, that a price hike in the local market will encourage trade from other markets (think LA running out of hand sanitizer, importing it from TN would normally be nuts, but now people can get their hands on it because some “meanies” decided to buy it up where people really didn’t care that much initially).
I sort of agree with you on the optimal solution, and there was this same sentiment in 2008 with oil futures (and there, it’s hard to distinguish speculation from supply/demand and hedging dynamics). But also remember that speculation serves the function of bringing future prices into the present. It serves to even more quickly tamp out a brewing shortage.
I do actually think it’s crazy to think the third-order demand shock of speculation is larger than the second-order demand shock of herding (gasoline in plastic bags!?) or first-order supply shock of a pipeline going out. If the problem is buyers buying (speculators are buyers—they don’t induce a shortage through their selling back into the market), then regulating sellers makes little sense to solve that—rationing is the way to go and businesses can make their own call on that (and big retailers do indeed implement quantity limits because they are hesitant to raise prices and experience the media fallout).
speculators are buyers—they don’t induce a shortage through their selling back into the market
Speculators aren’t selling back into the market now, and if their speculation doesn’t pan out, they might discard the product due to transaction costs rather than sell it back into the market later.
If you assume speculation is the biggie here (I’m skeptical) or if it is the only thing you care about, then that is correct. If there is a supply shock or a herding demand shock, then there will be faster stockouts.
What’s the goal, reducing speculation or helping allocate product to its most valued uses? I’ll take the latter every time, and letting price work as a signal is a useful means for that. I can also see a role for rationing.
Those goals don’t contradict. Reducing speculation is a method of helping allocate products to their most valued uses. “Bought by speculator, kept in a warehouse, and discarded months later” is not a valued use for a product, after all.
Furthermore, it sounds as if you’re defining “valued” as “willingness to spend on”. Defined this way, I have no desire to allocate products according to their valued uses. Poor people exist, after all. (I see a motte and bailey here where the motte is “spending money indicates what is a valued use, according to my definition” and the bailey is “spending money indicates a valued use, as most people would understand that phrase”.)
WTP is a pretty standard measure of valuation, but I understand the reticence to rely on that. Distributional concerns are legit, after all. If the goals didn’t contradict, I’d be much more reliant on efficiency/welfare arguments, and it would be quite messy and assumptive.
Anyway, they do contradict. This is because “bought by speculator, kept in a warehouse, and discarded months later” makes up so little of the sales volume, and that’s even if you include “bought by speculator, kept in warehouse, and successfully sold back in the market for a profit months later,” too. One knows this is the case precisely because speculation of this sort does not occur secularly—it occurs in response to catalysts like negative supply shocks and/or positive demand shocks, which make up way more of the price and quantity shifts. Basically, we’re back to bikeshedding—speculators aren’t the problem here, the “real” (in the economic sense) dislocation is.
One knows this is the case precisely because speculation of this sort does not occur secularly—it occurs in response to catalysts like negative supply shocks and/or positive demand shocks
If you’re suggesting that there actually was a greater total need for toilet paper at the start of the pandemic in the sense that the majority of the excess demand was not made up of speculators and panic buyers, I’d like to see some evidence for this.
I’ve been keeping speculation separate from panic buying in my mind, perhaps that has confused us, but I thought it was clear earlier. Panic buying is part of the demand shock. It’s not “smart” but it isn’t a “fake need” either. There are varying of uncertainty here, and eventually it does slip into stupidity (“I think I’ll run out next week, I might have enough til then, better get some in case” … “I have enough for months but I better grab more!”), and yet again mandating low prices does not defeat this tendency because it operates just like any other demand. If you want them to think twice, charge them more. Or ration. But mandating low prices is counter-productive.
Well sure, there you go, paternalism is easy to justify when people are seen to be so irrational that their perceived needs can be dismissed and replaced with your personal preferences.
That’s a good point about encouraging rationing through price ceilings, as -finally- a reason why they might push in the right direction. As we saw already, price ceilings are not a necessary condition for the rapid implementation of rationing by business. I doubt any induction would be incrementally strong enough or implemented early enough to either matter or justify abandoning any potential preference ordering ability of pricing. But that’s an empirical question, one that I cannot confidently dismiss out of hand.
Been a pleasure discussing with you. And while I personally don’t particularly hope to see new natural experiments on anti-gouging in the future, if we do, I sincerely hope we end up seeing solid analyses of the effects.
Well sure, there you go, paternalism is easy to justify when people are seen to be so irrational that their perceived needs can be dismissed and replaced with your personal preferences.
… in a real-world example of people being irrational over perceived needs.
Just chiming in to say that there has been a pretty good rationally speaking episode about this topic. (It features two conversations with two different people; the first is not super impressive, but the second is great.) it covers a lot of arguments.
The whole price gouging conversation is societal bike shedding. Modern governments can and do provide emergency aid almost in real time as disasters happen.
About price gouging, I’m not sure this is even the right question. Disaster recovery is the perfect situation where planned economy beats market: there’s a known need, affecting a known set of people equally, and the government has tax money specifically for this need.
And yeah, I also wish the “bikeshed” of price limits stopped being discussed, made into law, etc.
Giving people extra money so they could afford toilet paper would not have helped. The problem wasn’t that people couldn’t afford toilet paper, but that there wasn’t any available, and it was the panic buying and speculation that resulted in it not being available.
And the problem also wasn’t that the manufacturers had no incentive to make more toilet paper, so giving people more money to buy toilet paper wouldn’t have helped there either.
When I said the government should use tax money to finance disaster recovery, I didn’t mean it should give that money to individual people to buy disaster supplies.
In the first part, you’re saying that price limits have the same intent as withdrawal limits, rationing and so on: to prevent panic and speculation. That’s true, but it doesn’t matter if the result of price limits is different: empty shelves and not much else. That’s what the econ folks have been saying.
Triple prices or empty shelves is a false dichotomy.
Everyone gets the supply and demand curve. That’s not the point. Society exists to counter-balance natural bad luck not to amplify it. Social policies that make a disaster even more disastrous for an individual are going to produce rage. Your house got flooded, you have no heat or electricity, you really need some oil for your generator and now that oil is 10 times more expensive.
I get that price signals are a good way to coordinate everyone in a community consuming less of a good, but people will fundamentally dislike it because it makes a bad situation worse for an individual.
Also the actual reasons economists are against price gouging are hilariously theoretical universe of frictionless spheres type arguments. Supply chains can take ages to react to price changes even in situations where there is no government boogie man tweaking things. Just look at the microchip supply crisis.
The actual solution to these issues is having effective emergency supply delivery handled by the government. The whole price gouging conversation is societal bike shedding. Modern governments can and do provide emergency aid almost in real time as disasters happen. If X developed world government lacks that capability, smack’em at the ballot box and tell the next crew to copy whatever the other dozens of countries are successfully doing in that department.
The point economists make is that, on the contrary, price gouging does not “make a disaster even more disastrous,” and instead makes a disaster more likely to be addressed quickly.
Consider the case of a sudden positive demand shock (COVID toilet paper) - this is not a disaster that is causing individual-level suffering through paying exorbitant prices. Where this causes problems is when people can’t get the item. The best way to nip this herding behavior in the bud is to make it costly. Then people for whom the product provides a lot of value will still buy it while those marginal people will think twice and leave it on the shelf. As demand normalizes, prices can come down. This also encourages those “clowns” in Tennessee to buy up hand sanitizer and ship it at great expense to LA to resell it there for high-but-lower-than-without-this-supply prices. In this case, prices still do a great job of ordering preferences and delivering good outcomes, so no wonder pro- and anti-gougers don’t usually talk about it.
Now consider the case of a sudden negative supply shock (hurricane knocks out a pipeline) - this IS a disaster that is causing individual-level suffering through paying exorbitant prices, but in a shortage like this, what alternative allocation mechanisms exist that could enable people to get the product, and ideally more to the people who have more valuable uses for it? Rationing is one—you can only get X amount of the product and then you’re kicked from the market; when there is use-value variability, this is problematic as it means carving out exceptions to the rule (ambulance services get dibs on gas, do nurses trying to get to work also get dibs?). Another is to have the government ship in a bunch from elsewhere so prices don’t need to rise, but has the catch that it’s basically an implicit subsidy...for this specific group of people at this specific time in this specific place. That’s great on humanitarian grounds and helps spread the cost to the rich (who pay most of the income taxes), but if “just ship in more” is viable, this could also be done by the private sector, so why would we prefer the government to do this? One reason is that the private sector needs a price signal to act; reporting of stockouts is not as compelling to those inhumane businesses, but such wails would not be ignored by the government. In an extremely fast knockout of supply, potentially the government response would be better from a welfare/inequality standpoint—the extra supply will be on the way in X time regardless, so in the meantime, keep selling at low prices so poor people don’t have to pay the high prices. Except there are already stockouts, so this benefit won’t materialize because you can’t sell nonexistent product. In the situation that inventory is starting to move quickly, hiking prices helps slow that to buy supply chain time and also sends a signal out that there is opportunity (or to the government: that there is evil afoot), which draws in extra supply. The supposed benefits of government action in either case are missing. While prices don’t do as good of a job of ordering preferences here (which is why we don’t like them: https://journals.sagepub.com/doi/abs/10.1177/00222429211012107 ; though there are still some preferences to be ordered during stockouts [e.g., ambulances] and prior to stockouts [e.g., the person who needs gas in their generator TODAY vs. the person who wants some back-up gas]), they do everything else we want. In the extreme circumstance where the supply constraints aren’t local but all the way up the chain (chip shortage), it’s again not clear how government taking over sourcing will help, unless there really is a severe coordination issue at the top (government can obviously help when it controls import/export) or this constituency is not of concern to many except the government (sure, society, you want your [insert product] even though these people are suffering and won’t retool your resource allocation, so we are purchasing (gasp, a price signal)/commandeering (tyranny?) this factory for [insert government’s desire that aligns with the affected constituency]).
If you throw out supply and demand, which are the main drivers of prices, and say that they’re not the point, of course economists will look tangential. There are definitely some specific cases where you can think the price mechanism won’t “work” for us, but they are the exceptions, not the rule.
The market can stay irrational longer than your bum can stay free of shit.
If people hoard toilet paper, expecting to sell it at prices higher than the market will actually bear, at some point they’re going to discover that they overspent. They may even go bankrupt. But in the meantime, nobody had any toilet paper. And then, if the toilet paper price doesn’t go up like they anticipated, they may just destroy their stock of toilet paper because the transaction costs of selling it at the market price outweigh the profits of doing so.
The market punishes irrational people, but that doesn’t mean you get no irrational people. You get a steady stream of them, each of whom causes some damage in the process of being punished by the market.
Definitely but banning gouging doesn’t fix this problem. It makes it worse. Hoard without consequence!
I don’t see how. Maybe you can hoard without consequence but you also remove a major reason to hoard. The two reasons to hoard are either for personal consumption, or for resale.
For personal consumption: For people inclined to hoard it’s hard to see how “I’d better buy it now because they might be out later” is likely to induce a lot more hoarding than “I’d better buy it now because it might only be available for an unaffordable price later.”
For resale: This is the kicker and this is Jiro’s point—people get the idea “I’ll buy TP now before those rubes, then when its out everywhere I can resell for higher.” If its illegal to resell for higher then this excess TP is not hoarded because there’s no incentive to do so—people know approximately how much TP they actually need for personal use and there wouldn’t be much incentive to buy more. This is even more pronounced for durable goods like snow shovels, you only can use one shovel at a time but you could imagine yourself able to re-sell an unbounded number of snow shovels.
I think the gods-eye optimal solution would be something like allowance of price increases for people who are bringing goods in from outside and a ban on speculation. But in the real world it’s really hard to differentiate speculation from “legitimate” buying and selling, and, maybe it’s wrong or maybe it’s right, but it’s definitely not crazy to think that the net effect of second-order speculation induced shortages is worse than the net effect of first-order disaster induced shortages.
To treacherously switch sides to the pro-price gouging side:
The obvious solution is for shops to jack up prices as soon as an emergency situation occurs, thereby taking the wind out of speculators’ sails. Now businesses are not going to want to do this, since it’ll ruin their reputation with customers for minor short term gain.
So the actual solution is for the government to mandate price-gouging in emergency situations, this way businesses can do it, without having to bear the public opinion penalty.
If an area is declared a public disaster area, all shops are obligated to immediately implement scarcity prices. Scarcity prices work like this: as the stock of an item goes down, the price goes up by 100% of base cost for every 1% of missing stock. So by the time you only have 90% of toilet paper left in store, you’re already paying 10 * base cost for it.
Of course private citizens are also allowed to come in and sell whatever they want.
I’m not sure what incentive this creates for shop owners, like maybe they want to not bring stocks back up to normal, but whatever, I’m sure it’ll work out.
Modern society gives people too much incentive to live in floodable/hurricanable/earthquakable areas anyway, a bit more spice in their lives would shift populations to more reasonable regions to live in so it’s all good either way.
At best, this would only make sense if everyone had the same amount of money. They don’t. Mandatory price-gouging would mean the poor get screwed over.
Far better to have normal prices and mandatory purchase limits.
Of course :D
There’s a strain of thought that would say price allocation of society’s production itself is only ethical when everyone has the same amount of money, but that’s a whole other can of worms.
Actually, if you mandate normal prices (and often if you don’t, but the companies don’t want to lose customer goodwill) the companies will institute purchase limits on their own.
In other words, you’ve effectively argued for existing anti-gouging laws.
For personal consumption: if prices are ceilinged to be low, “might be out later” becomes “might be out sooner,” which makes getting to the store quickly more imperative, and not just for the hoarding-inclined but also the marginally-hoarding-inclined and maybe even the people who just heard something on the news.
For resale: Indeed, there is a weaker incentive to hoard at low present prices if near-future prices are capped. But costs are also part of that equation, and you can weaken the incentive power of high near-future prices by bringing those prices into the present and squeezing any potential margin that way. I’ll buy $1000 of TP today to sell for $2000 within 7 days, but would I pay $1500 for the same amount of TP today? First, if I expect $2000 to be the price, my margin is lower. Second, my expectations of continued price increases are dampened (I know I’m on the clock here because this price impulse won’t last forever), so maybe it won’t even get to $2000. Third, now I have more uncertainty about my time window. This is a ton more risk for me and maybe I’ll just put it in an index fund (lol).
Notice that in the price ceiling situation you can reduce the resale incentive but increase the personal consumption motivation whereas if you let prices rise, you reduce both the resale incentive and the personal consumption motivation. You also get the benefit, if it isn’t a closed economy, that a price hike in the local market will encourage trade from other markets (think LA running out of hand sanitizer, importing it from TN would normally be nuts, but now people can get their hands on it because some “meanies” decided to buy it up where people really didn’t care that much initially).
I sort of agree with you on the optimal solution, and there was this same sentiment in 2008 with oil futures (and there, it’s hard to distinguish speculation from supply/demand and hedging dynamics). But also remember that speculation serves the function of bringing future prices into the present. It serves to even more quickly tamp out a brewing shortage.
I do actually think it’s crazy to think the third-order demand shock of speculation is larger than the second-order demand shock of herding (gasoline in plastic bags!?) or first-order supply shock of a pipeline going out. If the problem is buyers buying (speculators are buyers—they don’t induce a shortage through their selling back into the market), then regulating sellers makes little sense to solve that—rationing is the way to go and businesses can make their own call on that (and big retailers do indeed implement quantity limits because they are hesitant to raise prices and experience the media fallout).
Speculators aren’t selling back into the market now, and if their speculation doesn’t pan out, they might discard the product due to transaction costs rather than sell it back into the market later.
Like I said, it’s their buying that is the problem. Higher prices or rationing are the key. Mandating low prices doesn’t solve it.
If you mandate low prices, they won’t be buying since they won’t have an incentive to speculate.
If you assume speculation is the biggie here (I’m skeptical) or if it is the only thing you care about, then that is correct. If there is a supply shock or a herding demand shock, then there will be faster stockouts.
What’s the goal, reducing speculation or helping allocate product to its most valued uses? I’ll take the latter every time, and letting price work as a signal is a useful means for that. I can also see a role for rationing.
Those goals don’t contradict. Reducing speculation is a method of helping allocate products to their most valued uses. “Bought by speculator, kept in a warehouse, and discarded months later” is not a valued use for a product, after all.
Furthermore, it sounds as if you’re defining “valued” as “willingness to spend on”. Defined this way, I have no desire to allocate products according to their valued uses. Poor people exist, after all. (I see a motte and bailey here where the motte is “spending money indicates what is a valued use, according to my definition” and the bailey is “spending money indicates a valued use, as most people would understand that phrase”.)
WTP is a pretty standard measure of valuation, but I understand the reticence to rely on that. Distributional concerns are legit, after all. If the goals didn’t contradict, I’d be much more reliant on efficiency/welfare arguments, and it would be quite messy and assumptive.
Anyway, they do contradict. This is because “bought by speculator, kept in a warehouse, and discarded months later” makes up so little of the sales volume, and that’s even if you include “bought by speculator, kept in warehouse, and successfully sold back in the market for a profit months later,” too. One knows this is the case precisely because speculation of this sort does not occur secularly—it occurs in response to catalysts like negative supply shocks and/or positive demand shocks, which make up way more of the price and quantity shifts. Basically, we’re back to bikeshedding—speculators aren’t the problem here, the “real” (in the economic sense) dislocation is.
If you’re suggesting that there actually was a greater total need for toilet paper at the start of the pandemic in the sense that the majority of the excess demand was not made up of speculators and panic buyers, I’d like to see some evidence for this.
I’ve been keeping speculation separate from panic buying in my mind, perhaps that has confused us, but I thought it was clear earlier. Panic buying is part of the demand shock. It’s not “smart” but it isn’t a “fake need” either. There are varying of uncertainty here, and eventually it does slip into stupidity (“I think I’ll run out next week, I might have enough til then, better get some in case” … “I have enough for months but I better grab more!”), and yet again mandating low prices does not defeat this tendency because it operates just like any other demand. If you want them to think twice, charge them more. Or ration. But mandating low prices is counter-productive.
Panic buying is a fake need when the supply shock has minimal direct effects.
If you mandate low prices, stores will often implement purchase limits—that is, the store will ration the product themselves.
Well sure, there you go, paternalism is easy to justify when people are seen to be so irrational that their perceived needs can be dismissed and replaced with your personal preferences.
That’s a good point about encouraging rationing through price ceilings, as -finally- a reason why they might push in the right direction. As we saw already, price ceilings are not a necessary condition for the rapid implementation of rationing by business. I doubt any induction would be incrementally strong enough or implemented early enough to either matter or justify abandoning any potential preference ordering ability of pricing. But that’s an empirical question, one that I cannot confidently dismiss out of hand.
Been a pleasure discussing with you. And while I personally don’t particularly hope to see new natural experiments on anti-gouging in the future, if we do, I sincerely hope we end up seeing solid analyses of the effects.
… in a real-world example of people being irrational over perceived needs.
Just chiming in to say that there has been a pretty good rationally speaking episode about this topic. (It features two conversations with two different people; the first is not super impressive, but the second is great.) it covers a lot of arguments.
A few weeks ago I said the same thing:
And yeah, I also wish the “bikeshed” of price limits stopped being discussed, made into law, etc.
Giving people extra money so they could afford toilet paper would not have helped. The problem wasn’t that people couldn’t afford toilet paper, but that there wasn’t any available, and it was the panic buying and speculation that resulted in it not being available.
And the problem also wasn’t that the manufacturers had no incentive to make more toilet paper, so giving people more money to buy toilet paper wouldn’t have helped there either.
When I said the government should use tax money to finance disaster recovery, I didn’t mean it should give that money to individual people to buy disaster supplies.