June 15, 2022
“So-called” because the term “price gouging” is unscientific! Just because you don’t like the price change doesn’t mean you get to drape your outrage in scientific garb.
Likely inspired by Elizabeth Warren’s recent bill, the most recent biweekly IGM Poll Question A asks about price gouging. (Warren has come a long way since her days as a Henry Manne student). Of course, the very term “price gouging” is unscientific, value judgment-laden, and not used by economists.
As several respondents observe, the question is a bit contrived and arbitrary:
“It would serve the US economy well to make it unlawful for companies with revenues over $1 billion to offer goods or services for sale at an “unconscionably excessive price” during an exceptional market shock.”
Why companies with “revenues over $1 billion”? This suggests an implicit “they-can-absorb-it” logic, rather than an understanding that supply and demand conditions set prices.
In actuality, a significant set of determinants of the effect of price controls is the nature or the attributes of the goods being exchanged—not the net worth, revenues, or other characteristics of the producer.
To take one prosaic example, a price ceiling on timber tends to generate more adjustments, more discoordination, than a price ceiling on blueberries, ceteris paribus. Since blueberries are perishable, the window over which buyers and sellers can adjust is much shorter. Were a price ceiling on blueberries imposed, sellers wouldn’t remove part of their supply to store it in inventory in the hopes that the price ceiling is only temporary. Blueberries have a short shelf life. But that response is very plausible for timber. The long-run supply curve (the supply curve allowing for the passage of time) for blueberries will tend to be far more inelastic. I raise this point about elasticities because goods’ attributes—such as durability—are a far more likely determinant of the consequence of price ceilings than is the “annual revenue” of the seller. Yet, the question ignores them.
Not to mention, as several respondents do, that “unconscionably excessive price” is highly arbitrary. Unsurprisingly, the results are about as much a consensus as you’ll see on the IGM polls (notable exceptions here, here, and here):
That the results aren’t even more overwhelming might be due to the question’s weasel words and ambiguity, but it might also be more evidence for Bryan Caplan’s observation about the dying light of economic theory—which is replaced by increasingly sophisticated empirical techniques.
Austan Goolsbee’s response is the best.
Interestingly, Milton Friedman devoted an entire undergraduate seminar at the University of Chicago in 1972 to price controls—less than a year after Nixon’s 1971 price fixing. Irwin Collier documents Friedman’s reading list here. I disagree with Friedman that the classical gold standard was an example of international monetary price fixing, but that quibble aside, the list is fascinating. It might have profitably included Murray Rothbard’s discussion of “triangular intervention” in Man, Economy, and State.
And if teaching this course in 2022, I’d add several additional readings:
But the first section of Friedman’s list is a great place to start for contemporary policymakers who ceaselessly gravitate toward price controls.