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Comment by briandear | Hacker News Reader

An argument supporting gouging: https://reason.com/2019/01/31/price-gouging-is-supply-and-de...

Yes, that is an an argument. It's just not terribly convincing if you don't already subscribe to the idea that markets are always right, externalities be damned.

High prices induce production that would not have occurred otherwise. They also curve demand downwards so that only those who really want the item will get it. There is little reason to outlaw price gouging save for humans have a disgust response to people who profit from tragic events. Absent these laws, there would be incentive to create stockpiles of needed items before a disaster and retool less-efficient factories to produce now more-profitable items during a crisis. We do not think markets are magic. We think they are machines that run on price signals, and bashing these signals with hammers will degrade the efficiency of the machine.

I do agree with the inducing production part. Where this massively fails is the "only those who really want the item will get it". This is really "the wealthy can afford the item without batting an eye and the poor be damned". Not exactly a great idea for essential items.

It is not that. A higher price doesn't magically mean that rich people get it and poor people don't. Everyone will respond to that price signal and adjust their behavior.

Everyone will also change their priorities. There seems to be this idea that there are millions upon millions of people who have a fixed budget and purchase plan that has no room for adjustment at all. I don't think that is true, it is a myth.

And in any case, if the preferred policy of not letting prices float results in a completely empty shelf in the grocery store, please explain to me how the poor, middle class, or rich are going to purchase anything from that empty shelf?

> High prices induce production that would not have occurred otherwise. They also curve demand downwards so that only those who really want the item will get it.

These are good points.

> There is little reason to outlaw price gouging save for humans have a disgust response to people who profit from tragic events.

There is at least one reason:

Setting a price ceiling means that the distribution of the good will be tilted more towards those with less financial capital than it would be if the price were allowed to climb further. I believe this is a point that many care about for a number of reasons.

I'm not arguing that it's better if you are optimizing solely for maximizing total utility received from the supply of the good, but I would question whether that is necessarily the right course of action.

Markets exist on the pre-supposition of a smoothly functioning society/civilization in which to conduct business; i.e. one not under the pressure of a perceived existential threat. The work exists to be done regardless of how "market signals" make it appear, and last time I checked, nobody has a great track record of either "making" or "applying" an economic wrench in ways that have had very satisfying results in about the last 30 year's or so. We want healthy people, and a minimally burdened healthcare system unroll either herd immunity, or pharmacological treatment becomes possible.

In short, pick up a shovel, and get to work. The Market will continue when people stop fearing existential threats.

Whether or not an economist is happy with that state of affairs is beside the point. Economists don't run the country. People do. Contrary to popular belief, most people are fine leaving money on the table as long as it pays off in the long run in terms of not losing those they care about.

What externalities?

One example is a pandemic.

The point is that capping the price of e.g. masks means _fewer masks_ are produced, which is worse for stopping the pandemic.

Price gouging laws typically apply at the consumer point of sale, I'm not sure they prevent a higher price from factory to store.

If the law prevents the store from charging a high price to the consumer, then that effectively prevents the factory from charging a high price to the store, because the store would make a loss if it accepted that price.

>>What if a seller increased the price of a good or service because the seller’s costs of providing the good or service increased?

>If the seller can prove that the increased price is directly attributable to increases in the cost of labor or materials needed to provide the good or service, the seller may not be liable under the statute.

It's right there on the linked page. This basically prohibits large markups while allowing for passing of costs.

How is that an externality?

I am intimately aware of exactly what constitutes an externality. I fail to see how this situation (two parties agreeing to a high price for a consumption good) has impacts on third parties.

I'm not sure how "pandemic" applies, either.

> Higher prices are also a deterrent against hoarding, particularly in the days leading up to a disaster. To be on the safe side, many consumers are inclined to buy more than enough of whatever they think they'll need. The more expensive the propane is, the more is available for everyone else.

I think this makes sense.

It would definitely stop people like this guy [1] going out and cleaning all the local stores/rural stores and mom and pop outlets of cleaning supplies, then selling the stuff on for a huge profit...

[1] https://www.nytimes.com/2020/03/14/technology/coronavirus-pu...

If the stores are underpricing, why shouldn’t people who are paying more attention reap those profits instead?

Someone’s going to get it. I’d rather it go to those paying attention and willing to put in the work to get it to where it is most needed.

You'll find a similar argument in any basic econ textbook. Put a cap on prices, then when demand rises for something (which normally leads to an increase in price, all other things being equal), the lack of an accompanying rise in price means there is no incentive to produce more of the good (no incentive for more producers to enter the market), so there isn't a corresponding increase in supply.

Might work okay in China, where the government can e.g. command factories to switch to producing masks, but it means American factory owners won't have any incentive to switch over to producing them.

And like most things, basic econ is not the be all and end all of how the world works otherwise we wouldn't have those all-important second year econ classes.

Price gouging is not an efficient market result for anyone - the goods aren't actually, in real terms, worth the temporary price (the costs of manufacturer's switching over production is going to wind up much higher then any profit they can make once they're tooled up) nor does their value represent efficient allocation of resources - the guy with 11,000 bottles of hand sanitizer has no use for them, outside of the extremely limited window of people panicking due to uncertainty.

But really, whether anyone believes this can be viewed through a very different lens: multiple times in the past week, US exchanges have ceased trading due to automatic circuit breakers from 7% drops in the market. Surely if the market is all knowing we shouldn't trigger these mechanisms and instead just let the invisible perfect hand let people sell stocks freely. After all, if we don't allow sudden plunges, what incentive will there be for investors to properly allocate their risk in the future?

But, no one's making that argument. Nor is anyone questioning why it was suddenly urgent that the government put $USD1.5 trillion of liquidity into the market.

>the costs of manufacturer's switching over production is going to wind up much higher then any profit they can make once they're tooled up

This is not necessarily true, especially if we consider that the pandemic may continue for a few months, and people will be using orders of magnitude more hand sanitizer and masks than before.

> the guy with 11,000 bottles of hand sanitizer has no use for them, outside of the extremely limited window of people panicking due to uncertainty.

He distributes supply over time. Instead of everyone panicking and buying up all the supply at time T, the scalper buys up some, and then gradually sells it at times T+1, T+2, T+3... Scalping is arbitrage between current demand and future demand, and ensures more supply is available when people need it in future.

This is comparing apples to oranges. A circuit breaker is not a price floor except in a very limited sense; the price is free to fall further the next day. I don't think many people would object to a rule like "the price of masks can only rise 10% per day".

> But really, whether anyone believes this can be viewed through a very different lens: multiple times in the past week, US exchanges have ceased trading due to automatic circuit breakers from 7% drops in the market. Surely if the market is all knowing we shouldn't trigger these mechanisms and instead just let the invisible perfect hand let people sell stocks freely.

Yes, you're basically right despite intending to be sarcastic. The circuit breakers are stupid and there's no real good reason for them to exist. Levine:

> The basic idea of stock-market circuit breakers is, like, some news happens, and the market reacts precipitously, and stocks fall 7%, and the market gets turned off for 15 minutes so that everyone can have some time to think and digest the news and see if they want to buy. On an average Tuesday afternoon, not everyone who might want to buy stocks is watching the market every minute. The computers are, sure, but some long-term investors are busy doing other things, reading 10-Ks or meeting with executives or whatever. Someone needs to call them up and say “hey not sure if you noticed but stocks are cheap now, you should buy some.”

> But you generally want to do this sort of thing through mechanical bright-line rules, and occasionally those rules get applied in kind of weird circumstances. The market did not fall 7% by 9:34 a.m. today because of shocking news that came out at 9:32! Investors had all weekend to ponder coronavirus news, and all of Sunday to ponder oil-price news, and they pondered it at their leisure, and futures traded limit-down, and then the stock market opened and investors applied their weekend’s worth of pondering to the market, with the result that the market shut down four minutes later. A weekend of pondering, four minutes of trading, 15 more minutes of pondering. I am not sure what you learned in the 15 minutes that you didn’t learn over the weekend.

Back to you:

> Nor is anyone questioning why it was suddenly urgent that the government put $USD1.5 trillion of liquidity into the market.

The government didn't do that. It loaned $1.5T over a very short term to banks. It was not targeted at the stock market and had no impact there.

> The government didn't do that. It loaned $1.5T over a very short term to banks. It was not targeted at the stock market and had no impact there.

But if the free market should be allowed to run unimpeded, why did the government need to intervene here, when apparently in the provision of basic necessities you are arguing this is going too far?

Banks are some of the most highly regulated businesses that participate in markets. One should not draw general conclusions from government intervention in regulated banking programs.

> when apparently in the provision of basic necessities you are arguing this is going too far?

I made no such argument.

Do you actually think our economy needs 200x as much hand sanitizer production?

If the demand runs high enough for long enough, it wont be an emergency, and emergency measures don't apply.

>Do you actually think our economy needs 200x as much hand sanitizer production?

Yes I do. If everybody is now sanitising their hands thoroughly and regularly throughout the day to prevent infection, this could easily be a 200x increase in hand sanitizer usage compared to what it was previously.

The President does have the power to direct factories to make masks during a national emergency.

That would be much more effective at increasing supply than price caps.

That's just poor reasoning on multiple levels: it assumes supply, the argument that it prevents hoarding misses that as prices are driven up the incentive to hold increases, and it overlooks that some populations night need the good immediately so real harm is being done.

The gain is personal, the harm is social, this is ethics 101 and solipsistic pseudo-libertarion reasoning doesn't make it right.

>solipsistic pseudo-liberation reasoning

Basic economics is solipsistic pseudo-liberation reasoning now?

The argument that the threat of gouging increases the motivation to hoard is basic economics. For analogous reasons there is FDIC insurance on bank accounts because the alternative is runs on banks that can lead to system collapse.

Not every point on the supply/demand curve is a good place to be.

>The argument that the threat of gouging increases the motivation to hoard is basic economics.

But the ability to increase price freely also decreases actual hoarding, because when stores see a massive increase in demand, they'll be incentivised to increase prices, which will deter unnecessary purchases.

If your goal is to prevent hoarding and ensure there's enough for everyone, it's simpler just to limit the number of rolls each customer gets. Fewer corner cases.

Are people hoarding because they're worried about being gouged on the price, or because they're worried about being unable to buy at all? Are the viral social media posts "OMG look at these high prices", or "OMG look at these empty shelves"? From a hypothetical perspective, which scenario creates a stronger incentive to buy supplies now: "Prices might rise 10x in the next month, but buying will always be possible", or "The supply might run out completely in the next month"?

Only if wrongly applied.

Should have been libertarian, autocorrect. But this isn't basic economics, is the point: this is about what to do with limited resources in the social context of an emergency. Ignoring the context to justify the economics is just dishonest.

I would rather the price 10x if it means people can buy toilet paper, than have it be unavailable to all. But I am thinking rationally rather than emotionally.

Toilet paper availability likely comes down to nothing more than distribution lag.

One scenario is that a few people have taken advantage of low prices to hoard unreasonable amounts.

A second scenario is that the number of people buying a reasonable amount exceeded the assumptions built into the distribution network.

In the latter scenario, high prices pretty much go in the pocket of the retailer (and so on), and availability is still low.

My intent isn't to try to characterize the second scenario as good or bad or okay or whatever, it's to point out a possibility that your comment doesn't address.

Take face masks, that front line medical workers don't have, that their procurement offices won't let them buy for 10x - we are all screwed if all our nurses are sick.

You are basically saying "I am ok pricing limited necessary resources up to where only I and people as rich as me can afford them".

I'm in favor of attacking poverty directly, e.g. with UBI, rather than conscripting private sellers to act as an inefficient ad-hoc welfare system.

I don't believe that necessarily.

I think people are not rational to think that "oh its too expensive" - I think they will still try to hoard it and speculate on prices going up to 15x. And so on and on until the crises ends or they end up with no place willing to sell it.

It'd likely be good business for Costco to keep prices where they have been and limit each customer to a certain amount.

(I expect the goodwill would outweigh the costs and any "foregone" profit)

Not imposed by the government, not socialism, just good business.

The main pragmatic problem with anti-gouging laws (or even just anti-gouging policies within retailers) is that when manufacture and distribution are not supported on the back end to keep up, it leads to shortages (as can be seen at most grocers in the U.S. and Canada right now). My local Wal Mart closed yesterday because they were cleaned out.

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