Comment on Price Gouging-BECKER

Protests against "price-gouging"in times of shortfalls in food supplies and other goods go back thousands of years. Alleged gougers and speculators have been hanged, assaulted, and ostracized. The recent energy bill passed by the House of Representatives has many good provisions, but also requires the Federal Trade Commission to set standards for "price gouging", and to punish offenders. Price controls emerged in virtually all countries, including the US, during World War II and other wars, when many products were in reduced supply. It might seem "where there is smoke there is fire", but I fully agree that prices should be allowed to rise to their equilibrium levels when supply is reduced due to natural and other catastrophes. As Posner indicates, attempts to suppress prices of gasoline or other goods that experience a great reduction in supply will require using less efficient ways to allocate the limited supply. The main alternative to higher prices is rationing in some form of another, such as selling on a first come first served basis, selling to persons willing to bribe the suppliers, and so forth. All these ways are inefficient, and discourage production instead of solving the problem of reduced availability of certain goods. Anyone who remembers the long lines and waits of an hour or more to get 10 gallons of gasoline after President Carter imposed gasoline rationing can appreciate the wasteful costs created by non-price methods of allocating a limited supply. Another example is the rent controls that many nations imposed during and after World War II. Most have since removed their rent controls, but certain cities like New York have kept them, although in a modified form. Most serious studies of the effects of rent controls in NY and elsewhere show that they speed up the deterioration of housing quality, they cause an inefficient allocation of the limited housing stock, and usually they harm rather than benefit the poor and the young who more frequently have to find housing in the rental market. Rent controls generally benefit middle class and older renters who often stay in large apartments at ridiculously low rents because it is too expensive to move to smaller apartments available on the open market. The angry reaction of consumers to high prices caused by a major catastrophe usually is not directed at the persons or companies that profit. For example, customers are now very upset at owners of gasoline stations as they have posted continual increases in prices due to reduced supplies of gasoline resulting from Katrina, and the rising price of oil. But the profits of most gas station owners went down, not up, after Katrina. They have to pay more for the gas they buy, and the higher prices cut back on the demand for their gasoline. It ishould be pretty obvious that a rise in the price of a major input in production, such as gasoline is to retail gas stations, lowers rather than raises their profits since costs of production have risen. On the other hand, profits have increased to operators of refineries that were not damaged by Katrina because the damage to Gulf oil refineries raised the wholesale price of gasoline, the main product of refineries. However, the higher prices and greater profits induced undamaged refineries to squeeze greater production out of their limited capacity, and companies hastened to repair the refineries that were damaged to cash in on the high prices. In fact, many were repaired in a remarkably short time. If price were not allowed to rise, profits of undamaged refineries would have been reduced, but the supply of gasoline would have increased at a slower, probably much slower, rate. Faced with cutbacks in supply, companies often voluntarily sell at lower prices to their regular and best customers to increase the goodwill of these customers, and also because there may be an implicit long-term contract with these customers to keep prices relatively stable. They sometimes combine low prices to favored customers with rationing of the quantities they give them, while raising prices sharply to their customers who buy less, or more irregularly. I have no problem with Posner’s two examples of legitimate use of controls over prices. In the salvage at sea case, controls are warranted because there is not time during a rescue effort to work out what would be the appropriate sharing rule. The attempt of the Alaskan seamen to hold up the owners for higher wages while at sea presumably broke an implicit contract that wages are fixed for the duration of the fishing trip. But shouldn’t price controls also be used in poor countries when they experience a catastrophic shortfall in the supply of a food staple, such as rice or potatoes (the Irish potato famine is the best-known example)? The poorest families may be unable to pay the higher prices, and they could face starvation. Still, I do not believe price controls are a good solution, for they discourage greater production and imports of the scarce food, and they encourage farmers to hoard their food crops. Governments of these countries, and richer countries too through humanitarian aid, should instead become active in buying rice or whatever crop is involved, and reselling that to poor families at lower prices. Or these governments should increase income transfers to the poor that would enable them to pay the high market prices. In the modern world, famines are caused not be high prices, but by bad governmental policies. Famines are virtually unknown in modern democratic societies. Yet famines and large-scale starvation are still sometimes found in dictatorships, such as in China during Mao’s Great Leap Forward. The problem there was not high prices, but Mao’s foolish policies. He first caused farm output to fall by his misguided attempt to leap forward,. He then forcibly took much of the limited supply of food from farmers, so that many of them starved to death, in order to feed city populations. In addition, he sold some of the reduced crop of grains abroad for hard currencies rather than importing grains to ease the food crisis.

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