In a disaster situation if there is no elasticity between price and supply then price gouging laws (social or legal) make a lot of sense. For example, if there's a fixed amount of water around regardless of price people shouldn't be able to raise prices.
But in this case there IS elasticity between price and supply, right? Uber is claiming that they'll deliver better service by increasing prices, because supply will increase proportionally. Thus, a functioning economy.
AND Uber is waiving 100% of their fees! Price gouging? Really?
(Side note: NYC would have more capacity for handing this emergency had they not given an artificial monopoly to cab companies over the last century, vis-a-vis medallions. I realize we can't change the past. Let's just be aware of it so we can learn how to improve.)
Maybe I'm misunderstanding your point, but your first sentence seems completely illogical.
If there is a fixed supply of water, what better mechanism than price exists to efficiently determine the best use of that water? Not allowing people to raise prices means you end up with wildly inefficient allocation of resources (i.e. first guy in line says, "Man, there's a remote chance this flooding lasts for 2 weeks. Water is the same price it was pre-hurricane? I'll take all you've got.")
Similarly, not allowing people to raise prices actually decreases supply. If you remember post-Katrina, there were numerous "anti-price gouging" orders enacted. The result? All the people who were willing to drive a truck full of generators (and plywood, and water, etc. etc.) 1000 miles to make a few bucks/hundred bucks profit per unit now had no incentive to do so. And so they didn't. And the people of New Orleans suffered needlessly.
The correct response to a fixed supply of water is rationing, not either fixed or floating prices. Because without water you die, or catch diseases from poor substitutes.
With a fixed price, whoever comes in first gets the most water; laggards die. With a floating price, whoever has the most money gets the most water; poor people die. Neither of these is morally superior. IMO.
I suspect water could be considered a special case, since it is so immediately necessary.
What if, instead, we were talking about bread? Assuming that rich people are fairly rare, then raising the price of bread high enough to be expensive but not so high that people cannot pull enough cash out of their pocket to pay for it, then the effect seems to me like it should be an approximation of a ration.
Clearly if Donald Trump gets to the store first and buys all the bread then nobody else would have any, but he could do that no matter the price. So long as the price is painful but feasible for anyone to afford, everything should work out more or less okay.
If the price is so high that nobody but Donald Trump can afford the bare minimum necessary, then there is certainly an issue, but I suspect raising prices that high would not be very effective.
I only consider water a (potential) special case because it is one of the few things that, in the event that it really is unavailable, people will start dropping dead pretty quick.
Bread, fuel, generators, etc... these are all things we can afford to be relatively dismissive of and just say that price caps are unneeded/bad. That may also be the case with water, but I don't feel comfortable saying that with my limited knowledge.
Fair enough. My point is we balk at a 200% increase in the price of gasoline but won't blink at a 100000% increase in the price of water.
Also consider that @ $1 per 16oz bottle you are paying $8/gal for essentially tapwater that was bottled and driven in from out of state. But try to sell a gallon of gas for $5 and you are some kind of monster...
As I recall, authorities turned away anyone trying to make a quick buck by selling essential supplies.
Even with fixed prices, there was a limited number of goods. Driving a truck there to unload your wares still made economic sense, if you could do it at a large enough scale.
God forbid people be allowed to voluntarily exchange their money for essential supplies!
Snark aside, whether it made economic sense or not was up to those people to decide. Clearly, it didn't make economic sense for people to drive 1000 miles to sell generators at cost, because people stopped doing it once they weren't allowed to profit.
Posters upstream discuss rationing, which never works well either. It still ends up in an inefficient distribution of resources. This is logical. How can the person doing the rationing possibly know how much water each of 300,000 individuals needs? Maybe I have a bunch at home and don't need any, whereas my neighbor needs extra because he's severely dehydrated. Whenever rationing occurs, there is always increased corruption and graft, and a market for the coupons (or whatever tally method is chosen) always arises anyway.
> Clearly, it didn't make economic sense for people to drive 1000 miles to sell generators at cost, because people stopped doing it once they weren't allowed to profit.
I literally thought they weren't letting anyone into the Katrina-damaged areas, whether they were trying to gouge people, or just sell necessary supplies, or even give them away for free.
I understand their rationalization - how do you tell a do-gooder from a looter? And even if you can prove they're a do-gooder, how do you know they won't fall victim to crime, and become another casualty for you to worry about? But I do disagree with it.
Even if there is no additional supply available, there still could be some benefit.
If the price of gas were far higher, people may not fill up their tank all the way and only purchase what they really need. So instead of the first X people getting full tanks and the next Y people getting nothing from an empty gas station, in some scenarios everyone could get a smaller amount.
However, the issue of poor people not having access at higher prices is still a problem. It may be better served by having the government step in to provide each person $Z in gas money (paid for by a tax on "gouging") rather than an outright gouging ban.
You highlight really good points. I guess at scale the government does exactly what you propose (step in and allocate supply per person), for example rationing in World War 2.
Agreed. I say "gas money" above so people envision the poor being able to pay for the gas at high prices, but the whole point of keeping it based on taxes and currency is so that the market can balance between alternatives besides buying gas as well.
I'd note that completely inelastic supply almost never occurs, even in a disaster. For example, if prices for water are high, it raises the likelihood that some entrepreneur will fill up a truck with water bottles and drive into a disaster zone to sell them. Or that a shopkeeper will stay open past his normal hours, or not set aside a bunch of water bottles for himself.
And of course there are dynamic effects of anti-gouging laws, too. Even if supply were unchangeable during a disaster, the knowledge that prices will--or will not--be allowed to rise when a disaster occurs change how shopkeepers will prepare when a storm is approaching.
NYC has been allowing black cars to pick people up off the street during the crisis, so there isn't a shortage because of "medallions". There's a shortage because 5 million daily subway riders have to find alternate forms of transportation.
I'm not sure there is actual elasticity here, despite Uber's claims. This is simply anecdotal, as a New Yorker on the UWS, getting downtown took upwards of 2 hours (instead of the usual 20) and the traffic was filled with numerous black cars. The real problem here is not the cars on the street, but more the capacity of the city. Great report on this here: http://www.npr.org/blogs/money/2012/07/31/157477611/does-new...
Good! Living in NYC boroughs there are little/no taxis, so we have to rely on car services. Since Sandy they are all consistently booked solid (provided you can even get them on the phone: most are "busy" forever).
Yet, with Uber dynamic pricing, I have been able to get a car when needed. Yes, I paid more - but at least I got a car that I wasn't going to get otherwise. Awesome!
Amazing how people switch their principals regarding free markets when it suits them. Especially rich people.
When consumer protection laws are drawn up, they will be the "end of America". When financial institutions have bankrupted themselves, they "need to be protected". It's "progress" to prevent people from bringing food onto private property so that you can massively overcharge them for unhealthy foods. It's "gouging" to allow others to charge more when demand far exceeds supply in an emergency.
I agree that leaning solely on price in all circumstances is a poor way to balance supply and demand. And I don't want anyone to forget how this works when social sacrifices are demanded for "American success" in the future.
Here's my question, gas stations are closing here in NJ when running out of gas. Why aren't they jacking up the price to astronomical rates? There are lines for miles to the gas stations that have electricity. Is this a failure of capitalism in the face of human compassion or what?
I assume it means that anyone caught price gouging during this emergency can't count on the law to look the other way.
There will probably be a ton of political pressure and publicity ('bad publicity' from the perspective of a business caught gouging) in an effort to make an example of those retailers that attempt to take advantage.
>Can you elaborate? Does he want to remove the anti-"gouging" laws?
Quite the opposite, he's a somewhat populist moderate Republican. He plans to prosecute people guilty of increasing their prices more than 10% during the crisis to full extent of the law.
This is perhaps good politics, but it is stupid economics.
Restricting price changes during a crisis (or any time really) is a fantastic way to create shortages, delay the arrival of needed or substitute resources, encourage hording, and so on.
Do you really think that raising (e.g.) gas prices by a large margin will somehow redirect resources to getting more gas into those areas?
* The gas stations without electricity aren't to get electricity any fast because the price of gas is higher.
* Gasoline shipments aren't going to come any faster.
* New gas stations aren't going to pop up as entrepreneurs move into the area to capitalize on increased demand for gas.
A disaster isn't necessarily a 'market force.' No one is going to get supplies into a disaster zone faster because they are trying to turn a quick buck. Especially since it isn't like they can setup shop and expect the increased prices to persist.
> The gas stations without electricity aren't to get electricity any fast because the price of gas is higher.
If you can sell gas for $10/gal then it becomes worthwhile to get a generator and start pumping gas.
If you can't sell gas at a premium you won't bother.
You could say the same for anyone with a truck that has a bulk tank. If they could go house to house selling gasoline at a premium you can bet good money people would be trucking in thousands of gallons of fuel for generators. But that's price gouging so everyone goes without...
Raising prices will reduce the amount of gas people are willing to put into their cars when they finally do pull up to a working pump. If more people only fill up partially, then more people will be able to make due for a time.
No, not at all. All of the gas is in the hands of people who bought it. The supple constraints are not problems of incentives, they are problems of physics. Roads are down, plant is not working, traffic, security, etc.
The reason anti-gouging laws exist is because jacking up prices has no benefit. It just keeps the poor people from having access to resources. 10 gallons of gas to a rich guy is not making the country or the economy better off, than if the gas is given to a poor/normal person, the day after a hurricane/earthquake, etc.
The Feds are going to be on the Hook for $6-7B to fix NY and that's going to be paid by everyone in the country. Most people aren't going to benefit from that, except for the local people in NYC. But we do that as a country to make sure all of the right incentives are in place over the long run, not just opportunistically in the short run.
The idea that "jacking up prices" has no constructive purpose is strictly incorrect . When you fix prices on gas, and the relative value of gas shoots up, gas gets allocated to the people whose time is least valuable. When you allow gas prices to float in the same situation, gas gets allocated to the people whose time is most valuable.
Neither allocation is optimal; it is indeed unfair for all the gas to go to investment bankers. But that doesn't make it efficient or even fair for all the gas to instead go to the people who can get to the station earliest and wait in lines the longest.
Equally importantly, when you fix prices instead of allowing them to float, you enable hoarding. People get gas who don't need the gas, because they're risk averse and overestimate the likelihood that they'll use up what they already have. So gas quickly runs out everywhere. If you leave the fixed price in place for long, eventually all the value that would have been captured by the station owners instead gets captured by the grey market (and the deadweight losses involved in transferring gas to that grey market).
It's obviously not good social policy to allow gas station owners to charge $100/gallon for gas during a disaster. But it also seems pretty silly for prices to be capped at 10% of the pre-disaster spot price. Gas could easily float up to $10, $15/gallon (ie: the price of gas in Europe), motivate stations to find creative ways to supply that suddenly lucrative market, dampen the consumer urge to fill their tanks to 100%, and not bankrupt anyone (Americans famously overestimate the impact of gas prices on their daily lives).
No, Not really. What's strictly incorrect are naive assumptions that the standard behavioural assumptions of "economics" hold in a disaster. The basics: truth telling, promise keeping, etc. The purpose of anti-gouging laws is a rational anticipation of Opportunism.
Opportunism is not dealt with by economics (assumed != existent), except obliquely. It is the providence of political economy, law and economics, and other areas that focus on the political Institutions that allow "rational-choice" econonmics to actually be logically rational. Some of these ideas are variants of: "I've got your back" in a disaster, so you can trust people to do the right thing, to avoid lord-of-the-flies.
While I appreciate your analysis, its important to keep an eye on the sandbox in which the black box sits. With 3m people without power, and with people losing their homes, no electricity, no cell etc, its more valuable to society to avoid over-generalizations of "rich people" are more important than "poor people" when all of the ATMs are broken, the surveilance cameras don't work, and the police stations are flooded, etc.
Thats just common sense and street smarts, really. Its not really a political or economic argument in the traditional sense (especially the partisan sense). Its more of a point about when the shit hits the fan, you preserve the fabric of society first. Sort of like the 80/20 rule. Having a "basically functional" market is better than having a "perfectly functioning" one but especially is better than having the market looted or burned down (etc). That being said, hording and etc are equally anti-social. Often times what you see is that the quantities will be limited (to say, 8-10 gallons of gas, etc). For this very reason. Those are fair and good points to raise.
There are lines miles long for gas. People do hoard in disasters. Gas in NY metro simply is more valuable now; for instance, as a substitute for the electric grid. Your reply is nonresponsive.
The amount you are willing to bid on something under duress is not the way to construct a proper-functiong market. Its important to seperate the short-term from the long-term, in this regards. In certain cases, its rational to obviate the market, into hierachy. see, for example: http://en.wikipedia.org/wiki/Hold-up_problem . This is precisely why firms are distinct from N-dimensional outsourcing arrangements, even under free-market capitalism, under ideal conditions.
So you can attack the problem from perfect conditions or imperfect ones. You may or may not like anti-gouging laws, but an plain vanilla analyis using under-graduate economics is naive to several critical factors.
I don't think you read my original comment. I think you skimmed it, concluded that I was arguing for abolition of all price caps to allow "free market capitalism" to solve all our problems, and wrote a philosophical response.
In fact, I don't believe we should abolish all price caps. I simply think the cap we've chosen is foolishly low. We have empirical evidence that a dense western urban area can survive on prices >300% higher than what they are in NYC now, and yet we've capped price increases at 10%. Fixing prices on a good whose intrinsic value is rapidly increasing, as gasoline's value clearly is in NYC, amounts to declaring a state-managed fire sale on gasoline. How can that possibly be a sensible response to a crisis of scarcity?
If you want to think about it from the other direction: price fluctuations in the gas market of 10% or more are not altogether uncommon, and empirically they do little to alter people's behavior. The 10% cap therefore amounts to a declaration that the market will not be allowed to alter people's behavior, despite the obvious fact that people are not behaving optimally --- and you can look at any gas station near NYC to verify that.
Finally, I just think you made a very flimsy argument upthread: that "jacking up prices", as you put it, serves no objective purpose. Well, no. Not true. At all. The knowledge that rising prices aren't an intrinsically bad thing will help in all sorts of situations where we have actual judgements to make in our lives.
No, the arguments are orthogonal. As such, getting into a point-by-point is of questionable merit. Its not that I don't understand what you are saying. To put it another way, economics is based on the premise of risk, not uncertainty. The two are significantly different. The purpose of political economy (ie, the orthogonal approach) is to box uncertainty and turn it into risk for a sub-space of actions. We can then set up markets to work efficienty in that sub-space where risk is a viable operating assumption. In a disaster situation, what was previously part of the subspace risk gets thrown back to uncertainty. In this case, if market-trading is suspended it is not-per-se evidence that "markets are broken". Its just evidence that they are misplaced for the time being. This may or may not make sense, at first glance. But it makes alot of sense when you think about it. There are lots of times when markets are not the best way to allocate goods (even in a market economy -- that is why we have firms). Unless you are comfortable with that idea, the rest of what I'm saying probably won't make sense in general.
I'm sorry, but to be honest, no, this doesn't make much more sense to me after rereading.
I'm sure there are elements of macroeconomics that don't apply in disasters, but all I'm talking about is the law of supply and demand, and how a 10% cap on gasoline price increases causes problems with it. I feel like basic supply and demand remains meaningful the day after a hurricane.
The distortions that follow from price-gouging are (arguably) worse that the distortions that follow from making it illegal. Probaly in orders of magnitude. Thats the general point.
The logical flow of this argument, with respect to the HN thread is as follows:
1) Opportunistim is predictable and adverse, so it creates distortions, as resources are allocated ex-ante to mitigate its impact.
2) Laws exist to minimize opportunistic behaviour, to minimize the distrotions and resources allocated to minimizing its impact.
3) Per (2), the existence of these laws is incrementally efficient.
4) Anti-gouging rules (2) when observed empirically, are not evidence that the market is broken.
5) Rather, these laws are on the books to make markets work better. Directionally.
[(4) was the original claim, starting this sub-thread]
You're most interested in "correctly" specifying the parametric details of (4). But while this is a valid line of inquiry, its not central to my larger point (5). Good arguments exist that the less change there is the better. Also, the precision of the tools normally used begins to decline.
The analytical toolkit one needs take the debate further is beyond a basic (textbook) understanding of supply and demand. While "supply and demand remains meaningful", it does so in a certain place, under certain contraints and assumptions. All of which are now <edge case> variants. The pre-sumption of equilibrium becomes questionable, externalities dominant, etc.
To wit: The edge case of supply and demand is, classicaly, the boundary of the firm. Inside the firm, supply and demand does not apply. Resources are allocated more efficiently by fiat than by negotiation.
So, in the same way that internalizing resource allocation into a firm is not a problem during the normal course for firms, its not per-se problematic to temporarily suspend or modify market trading terms in an emergency, and even to do so under the (correct) rationale of "efficiency".
I wasn't sure where I stood on the whole thing, but I think I agree that 200-300% of pre-crisis prices seems like a reasonable cap. Acknowledge that something happened but reign in the worst excesses of the market.
Jacking up prices gives distant suppliers an incentive to divert resources towards the disaster-struck area, reducing shortages.
Jacking up prices discourages people from buying goods that they don't really need, making them available to people who really do need them.
On the other hand, if prices are not allowed to increase, people have an incentive to hoard the scarce goods that they anticipate will become scarce. This of course creates those very shortages. And the hoarded goods go unused while the people who really need them are unable to buy anything.
Strict capitalism is heartless, and ruins society. If the only way to share is through dollars, the majority of the burden is placed on the poor. We pretend that capitalism is foundational because it is an easy way to control the vast complexity of resource sharing, but it isn't sufficient for a healthy civilization. Strict capitalism is a third world country, with all security and resources devoted to those with personal wealth.
Could you define this 'strict capitalism' that you think 'ruins society'?
There is a lot of evidence that other economic systems do ruin societies (communism, socialism, command economies, crony capitalism, etc) but generally capitalism is credited with being the most successful system for producing wealth and lifting people out of poverty.
The parent wondered why the price of gasoline was not currently astronomically high to reduce demand to meet supply. My response is that this means of sharing a limited resource disproportionally burdens those less wealthy. Over the long term it is reasonable to say that a resource has a high price.
In the short term, strict capitalism would say that a wealthy businessman makes better use of that tank of gasoline than someone who is desperately hoping to transport their family out of a flooded house to stay with relatives in another city. That social burden created by the loss the family man endures doesn't carry a dollar amount, so a system based strictly on capitalism can't recognize that it has become poorer than if the resource had been shared in some other fashion.
So charging more for a temporarily scarce resource is what 'ruins societies'?
How much gas do you think someone needs to transport themselves to another city? Imagine gas prices doubled so that someone had to spend $120 instead of $60 to fill their tank. Are you really trying to tell me that $60 is all that separates a functioning society from 'ruin'?
During a shortage, the high prices don't last forever, they only last as long as the shortage persists. Arguing as if the high prices are an ongoing problem for the poor or the rich doesn't make sense. In any case, it would be much better for the government to give the poor person $60 to purchase the more expensive gas (or the ice, or the food, or whatever was most critical for that person) rather than artificially manipulate market prices.
So charging more for a temporarily scarce resource is what 'ruins societies'?
Thoughtless adherence to an academic principal ruins societies.
it would be much better for the government to give the poor person $60 to purchase the more expensive gas
Why do you think that doubling the price will level supply and demand? It would take at least an order of magnitude, and the seller would have to conduct an auction in the presence of a representative sample of buyers in order to determine pricing. Also you're arguing for setting up an effective social program in the middle of an emergency. It's far more practical to suspend the free market for a week.
Unfettered capitalism in an emergency creates a divided, third world community of normal and desperate. If you want to argue anything, argue that.
While we're on the subject... Isn't it amazing what kind of rapid and effective response you get when the people in trouble are among the richest in the country (NYC/NJ coast) versus the poorest in the country (New Orleans)?
I'm not complaining. I'm back in my Manhattan office two days after a truly epic disaster. I rode the train into work this morning, along the coast of Long Island Sound no less. It took ~10 minutes longer than usual, but on the whole the recovery is phenomenally impressive.
Without getting into politics (too much)... there are a lot of reasons for different responses between this hurricane and Katrina. Parts of New Orleans being below sea level probably matters a lot. Plus, FEMA was pretty clearly mismanaged then and doesn't seem to be now. I think those two factors probably account for more of the variation than the wealth of the inhabitants does, and I'm sure that I'm unaware of other important differences.
It seems to me that humans, as a group, act compassionately during crisis. So compassion, or good marketing if you are a cold blooded corp. type, is a good reason to truck more in. FEMA can also, I'm sure, force a commercial concern to do it. They have lots of that scary tinfoil hat power.
Many comments in here seem to look at this problem so coldly and rationally. Anti-gouging has a deep moral component. If some of us are not trying to get one over on others of us then you can maintain a stronger community during a crisis.
If Bob's gas starts charging $15 for a gallon of gas in a crisis it will cause friction in the community between those who can afford vs. those you cannot and with the employees and owner of the gauging station.
We have also, well enough of us that laws were passed, decided as a society that its just immoral/unacceptable behavior.
Capitalism is great. It doesn't need to deal with this corner condition well to be a successful system.
Disasters are not a corner condition. Limited resources and unlimited wants is a permanent condition. Disasters just tweak the relative values of these parameters, which are reflected in prices. As always, the system adapts and re-routes the resources to where they're needed most.
This is all moot any ways. Town cars are allowed to pick up any passengers during the crisis. Effectively unleashing a whole lot more supply. As well town cars and yellow cabs are now allowed to pick up multiple passengers going to different locations while continuing to run the first passengers meter. I don't agree with this policy at all. You try getting an Uber car on a Saturday night it's not "surge pricing" when something goes up 3x times, it's just disgusting even more so during the current situation.
I don't see how the current situation can be called "disgusting" since Uber isn't making any money off of the current situation. (I'm assuming that you mean it's disgusting that they are using an emergency to make lots of money)
If I were them, I would sink some of that massive VC into paying the difference as marketing. Keep prices stable, but ration rides based on how often people have used uber. ie, attract as many possible new customers.
No, substantive marketing campaigns are orders of magnitude more. And, it depends on how many new customers they get and how long drivers will cost extra. The just raised $50 mil, and the subways will be back in a week, two tops... do the math. It isn't every day you can buy happy new customers and good press, and on the days you can it usually costs more.
But in this case there IS elasticity between price and supply, right? Uber is claiming that they'll deliver better service by increasing prices, because supply will increase proportionally. Thus, a functioning economy.
AND Uber is waiving 100% of their fees! Price gouging? Really?
(Side note: NYC would have more capacity for handing this emergency had they not given an artificial monopoly to cab companies over the last century, vis-a-vis medallions. I realize we can't change the past. Let's just be aware of it so we can learn how to improve.)