Thursday, October 24, 2019

Is Price-Gouging Good?

My Contemporary Moral Issues class had a lot of fun discussing Zwolinski's defence of price gouging recently.  I thought it might be worth sharing Zwolinski's arguments since most people seem to find them very surprising / counter-intuitive.

The basic idea is that in conditions of temporary scarcity (e.g. after a disaster strikes), higher prices can actually improve people's access to needed goods, via several mechanisms:

(i) Higher prices can increase supply by creating stronger incentives for new suppliers to emerge (e.g. freelancers buying up cheap ice in an unaffected area, driving it to the disaster zone, and selling it for six times what they paid for it).

(ii) Higher prices reduce demand, incentivizing people to economize where possible, leaving more of the supply available for others. (Example: raised accommodation prices might encourage families to share a single hotel room when they would otherwise sprawl out over several.)

(iii) Relatedly: higher prices can improve allocative efficiency, as those with urgent need of a good will generally be willing to pay more for it, whereas those who might merely like it (at the normal price) are more likely to wait or abstain when prices are inflated far beyond normal levels.

This latter correlation is imperfect, of course, due to background inequalities in people's ability to pay.  There is some risk that a poor person in need will be priced out of the market, unable to get what they truly need due to the price hike.  But one must compare that to the risk that some who truly need a good would be unable to get it if prices were kept low, due to others (with lesser needs) buying up all the available supply first.  If the latter risk is higher (as seems plausible in many cases), then people overall would seem better served by encouraging price gouging.

Zwolinski merely argues that price gouging is (in appropriate circumstances) permissible, and suggests that the virtuous agent might choose to keep their prices marked down closer to normal levels, maintaining merely modest profits.  But that strikes me as a mistake: why forsake the impartial benefits of price signals and allocative efficiency in this way?  A better solution, it seems to me, would be to keep prices high and instead just give some money to the poor so that they can afford the higher prices if they urgently need to (but are still incentivized to economize if their need is not so urgent).

Also worth flagging: I see no reason why it should be the special burden of merchants to support the poor in this way.  Of course, it'd be good for them to do so insofar as they can afford it (and with boosted profits they perhaps could afford it more easily than at other times), but the same general principle applies equally to the rest of us -- many of whom may be antecedently wealthier than street merchants, after all! (And many of whom may otherwise be doing nothing at all to help others in the disaster zone, in contrast to merchants who are providing much-needed goods!)

What do you think?

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