I hope their philosophy is better than their economics

At the Ask Philosophers website, there’s this question:

Put simply: does demand justify supply? If I sell an item – for instance, a computer-games machine – for a price that is much higher than either the RRP or the shop advertised price, and am able to do so given the scarcity of the item and the large demand for it, can I justify this by simply claiming that the fact that a person is willing to buy for that price justifies my selling it to them? Can this question be resolved so simply?

and this answer:

You are right to worry that this question cannot be simply resolved. In the case of the computer gaming machine, it seems reasonable to let demand determine the price. Even though people may very much want these new technological toys, nothing bad will happen to them if they cannot get them. But suppose we are talking about a scarce drug that has the potential to cure a life-threatening illness, such as bird flu? Or what about the resources (space in a car, or gas, say) to flee a city about to be overrun by an invading army? Those who hold these scarce and potentially life-saving resources are in a position to exploit the vulnerability of those whose life depends on having access to them. Whether it is morally acceptable for demand to determine price depends on whether the thing is needed or merely wanted; and if it is needed, how acute that need is. This means that, as you suspected, there can be no simple answer to your question.

The implied policy here is that people that hold “scarce and potentially life-saving resources” shouldn’t be allowed to charge as much as the market would bare in times of crisis. Sometimes this is is called price gouging, like when people start selling gallons of water for outrageous prices after a hurricane.

This policy makes sense if you just evaluate the effects on incentives today. It is outrageous to charge thirsty, desperate people lots of money for necessities like water. But if you consider the incentives in the future you’ll get a different answer.

If ‘price gougers’ are allowed to charge a lot for necessities during a crisis, they’ll have incentive to stock pile those necessities. If the price is high enough to warrant it, the higher price will encourage competition between stock pilers and the price, in turn, will go down. The net effect is that more of the necessities will be available during a crisis.

Without price gougers, hurricane victims are at the mercy of the government or volunteers to provide them necessities. The ample evidence, at least for the former, of complete incompetence makes me want to throw my lot in with the price gougers…

1 thought on “I hope their philosophy is better than their economics”

  1. Of course, there’s an element of risk in price gouging. That of being attacked by an angry mob and having all of your stuff stolen. I guess having the police come in to confiscate and redistribute your stock is the gentle version of that. You also get some fun game theory to play with on the business side: if everyone gouges, you’re fine, but if your competitor chooses altruism, he’s in a much better social position when things get better.

    *Side note – that reminds me of something I read about corporate aid packages sent to Kosovo. Seems a few companies decided to package surplus stock as aid packages to send to the refugees for the publicity and the tax writeoff. A few refugee camps had to deal with crates full of expired chapstick and sunscreen sent by their thoughtful benefactors in the West.

    In principle, I think your reasoning is sound. If I were a price gouger in hurricane country, I’d stock bottled water to cover the first week (it’s bulky, delicate, has a low value for its volume), and purification supplies for later weeks (small, better shelf life). Also, my shop would be a fortified bunker, and I’d have guards with flamethrowers. Just in case.

    I had a point written up about life saving drugs, but I guess our patent structure sort of protects us there. Patents aren’t functionally perpetual like copyrights are in this country, so a generic manufacturer could start production as soon as the patent runs out. I kind of wonder how often patent holders try to invoke copyright when their protections run out, but that’s a different topic.

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