The effect on consumer welfare is the sum of the change in consumer and producer surplus

Tyler Cowen linked to a post (Jeffrey Ely?) that tried to refute the standard economic argument that price gouging is beneficial:

Suppose that an unexpected shock has occurred which has two effects. First, it increases demand for, say bottled water. Second, it cuts off supply lines so that in the short-run the quantity of bottled water in the relevant location is fixed at Q. A basic principle of economics is that if you wish to maximize total surplus then you should allow the price to adjust to its market-clearing level. This ensures that those Q consumers with the highest value for water get it. The total surplus will then be the sum of all their values.

This simply assumes away one of the two major rationales for price gouging.  The whole point of allowing higher prices for water is too encourage producers to truck in water from outside the disaster zone.  So yes, if you assume away any supply response, then the case for price gouging becomes somewhat weaker, but it doesn’t entirely go away.  There’s still the advantage of allocating water to those with the highest need, which is likely to be an extremely important advantage during a natural disaster.

[And don't say it's still an allocation argument, as the water trucked in will reduce consumption elsewhere.  In fact, much will come from warehouses.  The high prices will induce warehouses to run a bit closer to the edge, while frantically calling for Poland Spring to ramp up production.  People will drink more water in aggregate, if some is trucked in.]  Jeff continues:

But in fact it is quite typical for the consumer surplus maximizing solution to be a rationing system with a price below market clearing. I devoted a series of posts to this point last year. The basic idea is that the efficiency gains you get from separating the high-values from the low-values can be more than offset by the high prices necessary to achieve that and the corresponding loss of consumer surplus.

Why would we only care about consumers’ surplus and not also the surplus that goes to producers? We normally we care about producer’s surplus because that’s what gives producers an incentive to produce in the first place.  But remember that a natural disaster has occurred. It wasn’t expected. Production already happened. Whatever we decide to do when that unexpected event occurs will have no effect on production decisions. We get a freebie chance to maximize consumer’s surplus without negative incentive effects on producers. And just at the time when we really care about the surplus of bottled water consumers!

This is wrong for two reasons.  We care about producer surplus because producers are people.   Except for the unemployed, people have dual roles; they are both producers and consumers.  So 100% of the loss of “producer surplus” is actually borne by consumers!  It hurts producers who happen to be consumers.  And since all producers are consumers, the net effect on consumers in aggregate is negative, contrary to his argument.  He made the common mistake of (implicitly) equating the effect on “consumer surplus” with the effect on “people who happen to be consumers,” which is everyone.

Now I expect some commenters to jump in with some absurd income distribution argument.  One common mistake is to assume consumers who are non-water producers (like Bill Gates) are poor and consumers who are water producers (like the guy who delivers water to my college, or the immigrant with the 7/11 store) are rich. But producers and consumers are simply two sides of the same coin.  If a society has a policy of “no price gouging,” then competitive industries like water supply have to figure that into their pricing system.  They must charge more during non-emergency periods, knowing they won’t be able to price gouge during emergencies.  Contrary to Jeff’s assertion, in a world of rational expectations there is no free lunch to redistribute to consumers.  If there were, we could simply have the government expropriate any unexpectedly large crop harvest, or an unexpected mineral discovery, and share the proceeds with “consumers.”  Does anyone think that if a country behaved that way producers wouldn’t begin to anticipate the future expropriation, and act accordingly?  Believe me, producers know price gouging is currently illegal, and that already factors into their pricing decisions during good times.

There’s no free lunch, so efficiency is the only relevant criterion to use here, unless you believe the government should also be setting water prices in non-emergency periods, due to some other factor like monopoly power.

And remember, producer surplus goes to consumers—100% of it.

Update:  Suppose Massachusetts decides to discontinue the state lottery.  It will do one last $100 million jackpot.  After the winning number is announced, should the state go “nah nah nah” and take back 99% of the winnings in a special unexpected tax, and spend the money on poverty programs?  After all, the poor need the $99 million more than the guy who would still be left with a million.  And there’s no effect on the future demand, since the lottery is being discontinued.  Or would governments that behaved that way eventually pay a price?  (Hint: consider the history of Argentina.)


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50 Responses to “The effect on consumer welfare is the sum of the change in consumer and producer surplus”

  1. Gravatar of Major_Freedom Major_Freedom
    30. October 2012 at 08:35

    This post was sublime.

  2. Gravatar of Saturos Saturos
    30. October 2012 at 08:38

    Finally, a post I agree with! You’re much better at microeconomics! :P

  3. Gravatar of Saturos Saturos
    30. October 2012 at 08:42

    For any given income distribution, the (idealized) market mechanism is the best way to satisfy preferences. (It does a pretty good job in the real world, too.) If you don’t like the income distribution, you should change it directly, instead of restricting markets.

    1st and 2nd welfare theorems, basic stuff. Trust Tyler to continue propagating his moronic contrarianism… the goal should be rationality, not ecumenicism.

  4. Gravatar of Mikael Mikael
    30. October 2012 at 08:45

    Markets do an amazing job at allocating resources, sometimes. Typically don’t though, when the marginal utility of a product is infinite (e.g. Healthcare or water in an emergency).

    So yes, there is a strong case for governments to make sure that people facing a life threatening emergency have access to water. If that’s not a free lunch, then at least the opposite is an unbelievably expensive lunch.

  5. Gravatar of Saturos Saturos
    30. October 2012 at 08:48

    Arnold Kling is back!!! (with pessimism): http://econlog.econlib.org/archives/2012/10/the_outlook_for_1.html

    Mikael, I notice you didn’t actually identify a market failure there…

  6. Gravatar of ssumner ssumner
    30. October 2012 at 08:53

    Mikael, More people with die w/o price gouging then with. You are right that there is a role for government. The government should buy up the expensive water and give it to the poor person who would die otherwise. But if there’s no time for the government to get involved with redistribution, price gouging will increase total water supply, and allocate to those who have the highest willingness to pay. On average that will save lives (not every time) as on average those whose lives depend on it will pay more.

    Someone so sick that their life depends on immediate water, is certainly not likely to be first in line in a non-price allocation system.

  7. Gravatar of Mikael Mikael
    30. October 2012 at 08:58

    Saturos,

    Well, I think a product with infinite marginal utility is pretty much the definition of market failure. Unless, of course, production is instantaneously elastic and consumers are totally rational and have perfect information…but then again, no one believes that….

  8. Gravatar of Major_Freedom Major_Freedom
    30. October 2012 at 09:03

    Saturos, EVERY economist is better at microeconomics than they are at macroeconomics, for the same reason every doctor is better at human health than they at astrology.

  9. Gravatar of Mikael Mikael
    30. October 2012 at 09:08

    Scott, I think you are right, assuming there’s only two alternatives; laissez faire price setting or price controls.
    What I’m saying is; market’s fail in situations like these. As you said, it’s people with the highest willingness to pay that get water, not the people that need it the most. I think situations like these actually calls for a egalitarian process in which water is distributed to each according to their needs.

  10. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. October 2012 at 09:10

    ‘Unless, of course, production is instantaneously elastic and consumers are totally rational and have perfect information…but then again, no one believes that….’

    Which isn’t needed, and that reminds me that someone here has professed to be a fan of Steve Keen, so;

    http://chrisaulddotcom.files.wordpress.com/2012/04/debunk.pdf

    Where Auld shows that a surprisingly small number of firms can replicate the ‘perfectly competitive’ model.

  11. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. October 2012 at 09:15

    ‘…it’s people with the highest willingness to pay that get water, not the people that need it the most.’

    And the best way to find out who the people who need it the most are, is to let markets function.

    There’s a reason Adam Smith made it the Diamond-Water Paradox, not the Diamond-Orange Juice Paradox. Right now a lot of people in NYC would be willing to pay to have water taken away.

  12. Gravatar of Doug M Doug M
    30. October 2012 at 09:19

    There are a few logical flaws here. The largest one being that you don’t seem to understand what a disaster is.

    Higher prices will not bring more fresh water to the area. It is a disaster area. If it was easy to bring in water it wouldn’t be a disaster. Or, should I say, no one brought bottled water to New Orleans with the intention of selling it, regardless of the prices peopole might have been willing to pay.

    In a disater area people are not both consumers and producers? Until the disaster clears, there are only conumers.

    The goverment cannot buy water from the seller/gouger and give it to the man who can not afford to buy water. The government can’t implement such a policy in the midst of a disaster. The government is mostly non-fuctional, with the exception of a few emergency and rescue personnel. Firemen are not going to charge market rates for water.

    Nonetheless, price gouging seems to be the only way to prevent hoarding. If someone has more than they need, but perhaps not more than he could possibly want, what will get him to release his inventory? He can sell it, or it can be taken from him.

  13. Gravatar of Mikael Mikael
    30. October 2012 at 09:20

    Patrick, yes you’re right. There are also a lot of wealthy people in NYC that would be willing to hoard water because they’re scared. Let’s say that there’s not enough water to go around for everyone, then one person’s hoarding is another person’s death.

  14. Gravatar of Major_Freedom Major_Freedom
    30. October 2012 at 09:21

    Mikael:

    Markets do an amazing job at allocating resources, sometimes. Typically don’t though, when the marginal utility of a product is infinite (e.g. Healthcare or water in an emergency).

    Mikael your assertion is demonstrably false, and quite frankly astonishing to read in 2012, and on the internet, and on an economics blog.

    There is no such thing as infinite marginal utility, even in emergencies. If there were, then the price of healthcare and water would be the size of all money expenditures in existence. While healthcare and water are highly valued, they are not infinitely valued. Have you not learned of the diamond water paradox, and how the paradox was solved by the marginalist revolution (Jevons, Walras, Menger)? Emergencies don’t change the fundamental fact that all utility is finite.

    So yes, there is a strong case for governments to make sure that people facing a life threatening emergency have access to water. If that’s not a free lunch, then at least the opposite is an unbelievably expensive lunch.

    Textbook example of economic confusion leading one to the non sequitur arms of statism.

  15. Gravatar of Major_Freedom Major_Freedom
    30. October 2012 at 09:27

    mikael:

    I think situations like these actually calls for a egalitarian process in which water is distributed to each according to their needs.

    Why not when there are disasters that are less intense than hurricane sandy? how about less intense than that? When exactly does an event qualify as an “emergency”? When the state declares it? Suppose the state declares a state of permanent emergency. Is it justified in establishing universal communism in accordance with “from each according to hismability, to each according to his needs”?

    People are dying even without natural disasters like hurricane sandy. According to your logic, impoverished children in Africa need your food, your clothes, your wealth, more than you do, so when should I stop over your house and take your wealth by force so that those who are in need, in what is a real state of emergency for them (starvation, elements, etc), can be given in accordance with their needs?

    Boom! goes your shallow justification for violence.

  16. Gravatar of Major_Freedom Major_Freedom
    30. October 2012 at 09:34

    Doug M:

    Higher prices will not bring more fresh water to the area. It is a disaster area. If it was easy to bring in water it wouldn’t be a disaster

    Doug, nobody claimed it was “easy” to do it. The fact that the price has to be higher before producers send more bottles of water closer to the area should suggest to you that more effort than “normal” is necessary to bring more water in.

    While it is true that it is unlikely that every disaster victim who desires water will be brought water from outside the regular market, but this doesn’t entitle you to deny that the higher prices cannot brong about ANY additional water. Maybe you are unable to think of ways to do it, but when you have lots of people who are free to set any price they want, you would surprised how innovative and effecient people can be. Just imagine black markets in totalitarian regimes to get a sense of this.

    Imagine there are people who are willing to pay $100 a bottle, for a total of 50 bottles. Are you saying nobody will risk trying to get water to them? People risk their lives for far less on a daily basis in “normal” times.

    Your assertion that Sumner doesn’t know what a disaster is, is off base.

  17. Gravatar of ssumner ssumner
    30. October 2012 at 09:36

    Doug, First of all that doesn’t address my argument. And second, you most certainly can bring products into a disaster area, so I have no idea what you are talking about. Right now trucks are driving all over New Jersey. The market is far better at coping with these emergencies than the government.

  18. Gravatar of Mikael Mikael
    30. October 2012 at 09:36

    Major_Freedom, If you honestly believe that intervening to help people from dying is a slippery slope to military dictatorship, I don’t think we have much of a chance for a worthwhile discussion.

  19. Gravatar of Lucas Lucas
    30. October 2012 at 09:40

    “Or would governments that behaved that way eventually pay a price? (Hint: consider the history of Argentina.)”
    Ouch!
    A bit of evidence that markets still work in the middle of a strong storm: people selling wet clothes at ridiculous low prices [1]

    1- http://www.lanacion.com.ar/1521838-los-comerciantes-de-belgrano-tuvieron-que-liquidar-la-mercaderia-que-se-mojo [Spanish]

  20. Gravatar of Major_Freedom Major_Freedom
    30. October 2012 at 09:55

    Mikael:

    Major_Freedom, If you honestly believe that intervening to help people from dying is a slippery slope to military dictatorship, I don’t think we have much of a chance for a worthwhile discussion.

    It’s your doing, remember. You are the one saying it’s justified to harm some people to help others in need.

    If some totalitarian dictator said “I am enforcing my dictatorship so that I can enforce a more egalitarian society, where I take from those with ability, and I give to those in dire need”, they would be using precisely your reasoning here on this blog.

    I am simply addressing the premises of your argument. If you don’t like the outcome, then it means your reasoning concerning disasters is in contradiction with some of your other convictions.

    I am not saying you personally believe dictatorship is justified, just that this is what your ideas here are currently implying.

    So again I ask, when should I stop over your house and take your wealth away from you, so that impoverished children in Africa who are in dire need, can be helped? I am not proposing a dictatorship to you, just a local “intervening”, to use your parlance.

    So what is your address? I can be there two weekends from now if you’re available.

  21. Gravatar of Major_Freedom Major_Freedom
    30. October 2012 at 09:56

    Or are you proposing more of a “Do as I say, not as I do” ethic?

  22. Gravatar of Don Geddis Don Geddis
    30. October 2012 at 10:13

    I can’t believe that I actually find myself mostly in agreement with MF. Possibly for the first time ever? (A little too extreme, as always, but his heart is in the right place. This time.) Has the universe gone insane? Or is it just me?

  23. Gravatar of Don Geddis Don Geddis
    30. October 2012 at 10:15

    (And yes, of course I realize that MF has a consistent perspective of zero-government libertarian markets-always. He just actually turns out to be right in microeconomics, but wrong in macro.)

  24. Gravatar of Major_Freedom Major_Freedom
    30. October 2012 at 10:15

    ssumner:

    Right now trucks are driving all over New Jersey. The market is far better at coping with these emergencies than the government.

    Off topic, but 99% of the time when you hear comments to the effect of “the government should intervene to help people here”, the person is not talking about efficiency, or actually getting the most help to the people most in need and in the optimal allocation.

    They would almost certainly be talking about a MORAL argument that is allegedly lacking in the market.

    See, the state can act “benevolently” (with your money of course), and thus can manifest a charity phenomenon, instead of a mutually beneficial arrangement. Many people morally recoil at the notion of the givers personally benefiting in the material sense whilst helping those in dire need. It just doesn’t feel right to them. They want help to go unpaid for.

    While it is one thing to help those in need voluntarily, it is quite another to use guns to force people to help those in need. The former is virtuous, the latter is just cowardly. 99% of the 99% mentioned above believe themselves morally virtuous by merely COMMUNICATING that they believe the state should use guns to help people in need, even if they themselves aren’t lifting a finger.

    ————–

    Last night at the shelter I volunteer at, I was having a conversation with another volunteer about whether or not it is justified to “price gauge” in disaster areas. I asked if it is better for 50 people to get 2 bottles each of water for free, or 100 people to get one bottle each for $25 a bottle (I assumed unchanged supply to focus on the moral issue).

    She replied she is against the price gauging, that the sellers should not have been greedy, and that it’s better that the 50 people get 2 free bottles than 100 people to get one bottle at $25 each.

    She was more concerned about the minds of those bringing the water, than the people who needed the water! She was willing to risk 50 people’s dehydration because she doesn’t want to think of greedy sellers!

    Obviously I let it go, but I could not believe it. Some people are just so against the Adam Smithian “self-interest of the baker” idea that they would rather needy people suffer and greedy people not gain, than greedy people AND needy people gaining.

    I was about to ask her if she felt personal joy through volunteering, but I didn’t want to go too far…

  25. Gravatar of Major_Freedom Major_Freedom
    30. October 2012 at 10:44

    Don Geddis:

    I can’t believe that I actually find myself mostly in agreement with MF. Possibly for the first time ever? (A little too extreme, as always, but his heart is in the right place. This time.) Has the universe gone insane? Or is it just me?

    (And yes, of course I realize that MF has a consistent perspective of zero-government libertarian markets-always. He just actually turns out to be right in microeconomics, but wrong in macro.)

    Don’t worry Don, the world is not insane. Like I said eons ago, there is more that I agree to with all you guys than I disagree with, it just doesn’t get revealed so much because this is a “macro” blog…on monetary policy…where the blog owner is proposing a new old monetary strategy and talks about it on 99% of his posts.

    If this blog were micro only, then I probably wouldn’t even be here, but if I were, then I would be one of the cool cats, and you and others would be emotionally and intellectually driven to protecting me from antagonism from some of the other posters.

    Ask yourself this: How can it be that my micro is right to you, but my macro is wrong to you? The answer of course is that whereas I start and stay in micro-economics, where everything that is “economic” transpires (despite being able to observe changes to various aggregates), whereas you guys start with macro, and then you either do a 180 in economic logic when considering micro, or, which is worse, you try to understand micro from a macro foundation.

    Just look at Sumner’s intonation, reasoning, and defense of the market process on this blog post. It is a complete reversal in economic reasoning as compared to his macro posts. I can see it very clearly.

    I was going to write a long post on how I can use the logic Sumner used in this post, to show how it completely contradicts his reasoning in his macro posts about money, but I see way too many errors in micro-economics made by other posters, and the person I am I couldn’t resist.

    You noticed this and agreed with it, and maybe that’s because you too do a reversal in logic between micro and macro.

    I am using the same economics for both. I am, or at least strongly try to be, consistent.

    I laughed at your assertion that my macro is wrong, because I am convinced yours is wrong.

    If we agree on micro, but not macro, then I think it is because I understand how free markets can be regulated by non-government means, whereas you insist that a lack of a single consciousness managing/controlling all, is a vacuum that leads to inability to solve certain economic problems.

    If you asked me further, I will say it goes waaaaay back to one’s metaphysics, whether it is consciously learned and addressed, or merely accepted out of convenience, which is usually the case, especially for specialists like economists.

    One possibly reason you may believe the economy needs a single consciousness (or select few consciousnesses, depending on various other convictions you have) overseeing all, either as a last resort or as an activist thing, is, well, I am currently working on a philosophy of my own and I’d rather not clutter this blog any more than I do already.

    All I will say is that economics as a field of inquiry was corrupted by irrational metaphysics, which split economics up unjustifiably into two spheres, micro and macro. I say irrational because macro is based on a denial of individual reason of others, in favor of central planning driven by the reason of the individual macro-economist themselves who ponder these questions.

    Macro is a field of inquiry that I hold to be full of almost complete gobbledygook. It is the wasteland, escape hatch, garbage bin, repose of all prejudices, biases, emotional baggage, contradictory beliefs, drives, urges, all the stuff not based on individual reason.

    The best analogy I can think of is this:

    Micro economics is a place where the puzzle pieces are fit together one by one, with some mistakes made along the way, but overall, progress in making the puzzle.

    Macro economics is the box with all the remaining puzzle pieces, all jumbled up, but macro-economists want to make sense of that messy box by trying to find rather crude based descriptive concepts that seem to fit. Let’s call these puzzle pieces in the box “aggregate movement of puzzle pieces.” Then, they are lead to believe things like “as long as these puzzle pieces in the box are “moving” at MY PREFERRED RATE, then the puzzle making on the other side of the table is working efficiently”, and things like that.

    Imagine an imperfect person making that puzzle. They can only be rational in the micro-world of the puzzle making, but they take out their emotional prejudices and biases and irrational convictions on the poor puzzle pieces in the box, because it’s friggin frustrating sometimes making puzzles.

  26. Gravatar of Michael Michael
    30. October 2012 at 10:49

    When will people stop trying to outsmart the price mechanism during natural disasters??

    I’m sharing this post on Facebook. I hope my idealistic 20 and 30-something friends will read this carefully.

  27. Gravatar of John John
    30. October 2012 at 10:49

    Sadly it doesn’t matter how much you tear apart anti-capitalist arguments with logic. Anti-capitalists are driven by and appeal specifically to emotion. I like what Friedman cited about the author who claims that socialism is a form of Freud’s “death wish.”

    http://www.youtube.com/watch?v=W-8g5S0z5Y4

  28. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. October 2012 at 11:05

    ‘Higher prices will not bring more fresh water to the area.’

    Sure they will. They always have.

    ‘It is a disaster area. If it was easy to bring in water it wouldn’t be a disaster.’

    And, since it isn’t easy, it’s more costly to do so, and the entrepreneurs who bear those higher costs need higher prices to compensate.

    Everyone seems to miss those higher costs.

  29. Gravatar of Rajat Rajat
    30. October 2012 at 11:36

    in a world of rational expectations there is no free lunch to redistribute to consumers. If there were, we could simply have the government expropriate any unexpectedly large crop harvest, or an unexpected mineral discovery, and share the proceeds with “consumers.” Does anyone think that if a country behaved that way producers wouldn’t begin to anticipate the future expropriation, and act accordingly?

    Sounds like Australia with our Minerals Rent Resource Tax, formerly known as the Resource Super Profits Tax. I am not kidding, it operates on top of royalties.

  30. Gravatar of SG SG
    30. October 2012 at 12:03

    MF:

    You said “I understand how free markets can be regulated by non-government means, whereas you insist that a lack of a single consciousness managing/controlling all, is a vacuum that leads to inability to solve certain economic problems.”

    Scott’s a utilitarian. The reason he advocates for a monetary regime controlled by a central bank is because he believes that it makes our society much better off. Is your disagreement with him about macroeconomics an empirical disagreement (the world would be better off without a central bank controlling the money supple) or a principled disagreement (it’s always wrong to force people to use government-sponsored currency as the medium of exchange)?

  31. Gravatar of Major_Freedom Major_Freedom
    30. October 2012 at 12:08

    SG:

    Scott’s a utilitarian. The reason he advocates for a monetary regime controlled by a central bank is because he believes that it makes our society much better off. Is your disagreement with him about macroeconomics an empirical disagreement (the world would be better off without a central bank controlling the money supple) or a principled disagreement (it’s always wrong to force people to use government-sponsored currency as the medium of exchange)?

    Both. I hold a free market in money would make “society” better off, and I also hold that a free market in money is ethically superior.

  32. Gravatar of SG SG
    30. October 2012 at 12:16

    MF: if you were hypothetically wrong about the empirical result of a free market in money, you would still oppose a government-sponsored central bank on ethical grounds, yes?

  33. Gravatar of Major_Freedom Major_Freedom
    30. October 2012 at 12:31

    MF: if you were hypothetically wrong about the empirical result of a free market in money, you would still oppose a government-sponsored central bank on ethical grounds, yes?

    That is an incoherent question to me, because if initiations of force are used, then that ipso facto makes people worse off, not better off.

    I can only think of assuming hypotheticals if they are at least internally consistent.

    The empirical result and the ethical principle overlap when it comes to money production.

  34. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. October 2012 at 13:09

    We also always keep in mind that Wal-Mart has been the most efficient disaster relief agency, at least since Katrina;

    http://myslu.stlawu.edu/~shorwitz/Papers/Wal-Mart_to_the_Rescue.pdf

    ———quote——-
    Beyond the knowledge signals of prices and profits, private sector firms are often very effective at acquiring knowledge of local conditions that can be extremely useful in a crisis. At the most basic level, operating in the marketplace demands that firms selling physical goods or personal services locate where the demand is. For large retailers like Wal-Mart, this means it has a presence across the United States as its stores generally
    track the population distribution of the US (Hicks 2007). However, Wal-Mart is particularly known for locating in smaller towns and suburban/exurban areas. The company is also known for getting involved with the local community in a variety of ways, not to mention often serving as a node of social interaction for both customers and associates. As a result of this decentralization of resources that is inherent in the market, firms such as Wal-Mart are very likely to have supplies and human capital near where
    disasters occur, and they are also likely to have knowledge of the particular communities in which they operate as well as connections with community leaders. Because their
    employees, both managers and associates, are drawn from the local community and because they are a daily presence in the lives of residents, they have contextual and tacit
    knowledge that can be, and during Katrina was, very useful in a crisis. These relationships also built mutual trust that can be called upon during a crisis.

    By contrast, FEMA does not have offices in each and every small town nor the knowledge gained by ongoing daily interaction with residents. FEMA employees are more likely to be based in Washington or a state capital and, as professionals, are more likely to be relatively new to an area should they be located where a disaster strikes.
    They would lack the local knowledge necessary to know where help was needed.
    ———-endquote———-

  35. Gravatar of Ben J Ben J
    30. October 2012 at 16:48

    MF: if initiations of force are used, then that ipso facto makes people worse off

    And this, ladies and gentlemen, is the seed from which all Major Freedom’s posts grow.

  36. Gravatar of Philemon Philemon
    31. October 2012 at 01:30

    @MF:

    That is an incoherent question to me, because if initiations of force are used, then that ipso facto makes people worse off, not better off.

    Isn’t it possible that the case may be between initiations of force by a centralized authority and thus people being worse off, and no such central authority but people are none the less still worse off, perhaps even more worse off than in the previous case?

    In other words: a trade off is always possible–unless you believe that initiations of force is the ONLY way to make people worse off, or that it makes people INFINITELY worse off compared to other ways by which people might be made worse off. Do you believe that?

    If a trade off is possible, then there will always an empirical question as to whether–given a particular set of circumstances–it might be the better thing (as far as overall utility goes) to have the monetary regime controlled by a central bank rather than not. The answer could really come out one way or another–the data, not first principles, have to determine the outcome.

    (I do believe that on many, many issues, the data work against having that central authority and initiator of force. That is, on enough issues that tilts me to the libertarian side of the fence. But on all issues? Probably not. Sometimes, it’s better to have the lesser of evils.)

  37. Gravatar of Saturos Saturos
    31. October 2012 at 03:56

    I’m with Philemon.

  38. Gravatar of William William
    31. October 2012 at 05:09

    If a society has a policy of “no price gouging,” then competitive industries like water supply have to figure that into their pricing system. They must charge more during non-emergency periods, knowing they won’t be able to price gouge during emergencies.

    Scott,

    I feel bad nitpicking on something that is functionally equivalent, but I wish that economists would avoid this kind of phrasing, however convenient it may be. As a producer, having higher costs doesn’t permit you to charge higher prices. If covering your costs means you “must” charge a price higher than consumers are willing to pay, you are going to go out of business.

    In the long run, legalizing price gouging allows more producers to profitably supply water, which means that there is more water in non-emergencies, which means that prices are lower. It’s a longer way of stating the exact same situation, but it’s more true to economic theory.

    By the way, Matt Yglesias did a very good post on exactly this topic:

    http://www.slate.com/blogs/moneybox/2012/07/05/does_uncompensated_care_raise_prices_for_the_insured_.html

  39. Gravatar of Steve Roth Steve Roth
    31. October 2012 at 05:11

    Scott, aren’t you assuming here that all players have immediate access to cash (or credit) — that they’re unconstrained in this regard?

    If that is true, then their “revealed preferences [needs]” will automatically allocate the resources to those who prefer (need) bottled water.

    But of course that’s not true. Needy players right now might be experiencing, simultaneously, both a surfeit and dearth of “liquidity.”

    “Need” is decidedly not synonymous with “ability to pay.”

  40. Gravatar of Felipe Felipe
    31. October 2012 at 05:26

    There’s no free lunch, so efficiency is the only relevant criterion to use here, unless you believe the government should also be setting water prices in non-emergency periods, due to some other factor like monopoly power.

    Related to this, I think the argument only holds if the unexpected event has not reduced competitivity in the industry. If the disaster has effectively limited mobility to (say) one block, then the suppliers are now monopolistic, since a single store will control the supply for the entire block. The single competitive market was transformed into multiple monopolistic markets.

    So I think there is an argument for “no price gouging” policy. However, now you need to prove that such an extreme fragmentation does happen. I’d be very surprised if that were the case.

  41. Gravatar of J Mann J Mann
    31. October 2012 at 07:45

    Here’s an interesting reverse price gouging, from NYC via MarginalRevolution.

    “If you think Chinatown normally has an unpleasant odor, imagine what it smells like 24 hours following no refrigeration. Street vendors were trying to unload perishables at bargain prices. I saw a fish weighing roughly 20 pounds and spanning 3 feet from head to tail go to a buyer for $1 dollar. $1 dollar!!!!!”

    http://marginalrevolution.com/marginalrevolution/2012/10/price-flexibility.html

    Question: Would anti-price gougers outlaw that trade? Why not require the consumer to pay the previous market price, rather than permit their outrageous greed?

  42. Gravatar of Major_Freedom Major_Freedom
    31. October 2012 at 13:27

    Ben J:

    MF: “if initiations of force are used, then that ipso facto makes people worse off”

    And this, ladies and gentlemen, is the seed from which all Major Freedom’s posts grow.

    Well, I’d rather have that seed, than one that says “Psst, go ahead, satisfy yourself by hurting people “in certain situations”, of course according to your own desires, and maybe with enough hand waving, you’ll convince your victims it’s really for their own good.”

    Philemon:

    “That is an incoherent question to me, because if initiations of force are used, then that ipso facto makes people worse off, not better off.”

    Isn’t it possible that the case may be between initiations of force by a centralized authority and thus people being worse off, and no such central authority but people are none the less still worse off, perhaps even more worse off than in the previous case?

    How can systematic (permanent) initiations of force be “less worse” than ANY OTHER alternative? It makes no sense. The fact that you are unsure, should be sufficient in your mind for you to accept my argument that abolishing systematic (permanent) initiations of force, is a requisite to improving ALL human life.

    In other words: a trade off is always possible–unless you believe that initiations of force is the ONLY way to make people worse off, or that it makes people INFINITELY worse off compared to other ways by which people might be made worse off. Do you believe that?

    Trade offs don’t mean you can keep going further and further in one direction, replacing on by another. A monopoly institution of coercion is, in form, not necessarily in content, the extreme case.

    The burden of proof is on you to convince me that you initiating force against me makes me better off than you not initiating force against me.

    If a trade off is possible, then there will always an empirical question as to whether–given a particular set of circumstances–it might be the better thing (as far as overall utility goes) to have the monetary regime controlled by a central bank rather than not. The answer could really come out one way or another–the data, not first principles, have to determine the outcome.

    I am not concerned with “overall utility”, because such a thing does not exist. There is only individual utility.

    If you refer to past data, that has nothing to do with me or any other individual in the present and the future, because we change and we learn. If you are referring to future data, in a consequentialist form of ethics, then such data cannot answer the question of what we ought to do and what we ought not do in the present, right here and now, when we have to decide who can and can’t do this or that.

    Empiricism also cannot be the foundation for answering such questions because we can’t observe the counter-factual world that otherwise would have existed had the central bank not existed. We only have a world with central banking. The only data available in such a world is, obviously, central bank world data. If we observe a particular set of data from 1971-2012 for example, then the data alone cannot tell you whether or not 1971-2012 would have been “better” had there been no central banking. You NEED a cognitive based foundation, in order to make such conclusions.

    Thus, contrary to your claim, it is indeed first principles, not empirical data, that must be the foundation for answering this question.

    (I do believe that on many, many issues, the data work against having that central authority and initiator of force. That is, on enough issues that tilts me to the libertarian side of the fence. But on all issues? Probably not. Sometimes, it’s better to have the lesser of evils.)

    Freedom in money is not a worse evil than communist control of money. Let’s be serious here.

    Saturos:

    I’m with Philemon.

    That’s why you also are not an economist nor an ethicist. You fallaciously think economics and ethics are empirical sciences. They are not, and never have been.

  43. Gravatar of Don Geddis Don Geddis
    31. October 2012 at 15:15

    Related: a cartoon video from Matt Zwolinski defending the ethics of price gouging.

  44. Gravatar of Steve Roth Steve Roth
    31. October 2012 at 17:13

    Just to add to this:

    The supply-side argument assumes that the market will have time to arrive at or at least move toward a new equilibrium.

    But: If the seller knows (because expectations matter) that in four days the disaster will have passed and the buyer will be able to get water out of the tap for (almost) free, the seller has no incentive to bring in new supply. He’s got the incentive to sell what he’s got for as much as he can get, from those who have cash on hand — then when the disaster has passed, build a swimming pool and fill it with water.

    In the short run, we’re all dead. Or at least those who don’t have cash.

  45. Gravatar of Philemon Philemon
    1. November 2012 at 01:47

    @MF

    How can systematic (permanent) initiations of force be “less worse” than ANY OTHER alternative? It makes no sense. The fact that you are unsure, should be sufficient in your mind for you to accept my argument that abolishing systematic (permanent) initiations of force, is a requisite to improving ALL human life.

    Why not? If the choice is between multiple roving bandit bands pillaging at will, on the one hand, and having one stationary bandit gang doing the systematic extraction (being a stationary bandit gang, it responds to incentives not to over extract and even provides some public goods to encourage more production so that they can extract more), on the other hand, then the latter is the lesser of evils.

    Sure, if I can do without both and live in a world in which there isn’t any systematic initiations of force at all, it would be even better. But unfortunately, that option is not always on the table–either that or “abolishing systematic (permanent) initiations of force” can only happen if backed by sufficient force (e.g., to overthrow that stationary bandit band and permanently prevent its return).

    So even deliberating as an individual who is more likely to be on the receiving than the giving end, I could well come to the conclusion I am still better off living in a situation in which I am subject to some systematic coercion by a central authority, than if I am not. The transition to “overall utility” happens when enough individual makes the same judgement in tradeoff. More modestly, my point is that there can be many concrete circumstances in which that would be the wiser conclusion–even while granting that they could also well be other circumstances in which “no systematic (permanent) initiations of force” becomes a real option. What options are actually available within a particular set of circumstance, or which type of circumstances we are living in, is an empirical question than has to be established by observation and inductive reasoning.

  46. Gravatar of Saturos Saturos
    1. November 2012 at 03:00

    Steve Roth, you would not make a very good futures trader.

    Don Geddis, good point, time to retweet that one again.

    I’m still very much with Philemon. I would only add that our current system is very much better for us than an Olsonian stationary bandit. (And not entirely due to being more “democratic”, contra Scott.)

  47. Gravatar of ssumner ssumner
    1. November 2012 at 06:24

    Steve Roth. I think you pretty much missed the entire point. No I’m not saying need is correlated with ability to pay, I’m claiming need is correlated with willingness to pay. Only a complete madman would deny that.

    On average, someone willing to pay $100 for a bottle of water will get more utility from it than someone willing to pay $1 max. Do you seriously disagree?

  48. Gravatar of Jim Glass Jim Glass
    1. November 2012 at 16:31

    @Mikael

    I’m writing from NY where electricity is not expected for 10 days, thus no (among many other things) heat as nightly temperatures are forecast to go steadily down to the 30s — and yes, a lot of people have to boil water or have worse water problems.

    I’m posting this using power from a generator at a shelter where I’ve been helping to move geriatric entitlement-collectors, lest they freeze in their homes.

    Markets do an amazing job at allocating resources, sometimes. Typically don’t though, when the marginal utility of a product is infinite (e.g. Healthcare or water in an emergency).

    Whenever anyone resorts to invoking “infinities” in economics, every bullspit detector in the region should start shrieking its siren.

    There are also a lot of wealthy people in NYC that would be willing to hoard water because they’re scared. Let’s say that there’s not enough water to go around for everyone, then one person’s hoarding is another person’s death.

    So NYC suddenly was built in Death Valley? LOL.

    Note how totally unrealistic and absurb infinities and straw men have to be propped up to make the argument. Here’s how reality works…

    In my basement I have a big sheet of plywood that my dad built a big Lionel train set on for me when I was a kid.

    Say a huge hurricane disaster hit Florida at the time, and mega-orders of plywood were needed to close roofs and walls from weather to let people survive exposure and save their properties. Then the big plywood distributing companies in Michigan had to decide whether to send plywood to Florida or wherever.

    If the Florida authorities say…

    [] “No price increase for plywood here!” — as if there had been no increase in demand for it, and no increase in supply of it was desired — then the Michigan distributors send no less to NYC than originally planned, and I get my toy train Christmas present as Floridians face ruin and death due to open exposire.

    [] “The price of plywood goes up as high as it takes for the resulting increased supply to meet our explosion of demand” — so the Michigan distributors flood plywood into Florida, my dad looks at the cost of the plywood remnants here in NY, and he buys me a remote control model airplane instead.

    Which is the better course for the people of Florida? Water distributors nationwide sell water in bottles by the millions. There is no difference between plywood and water.

    I think situations like these actually calls for a egalitarian process in which water is distributed to each according to their needs.

    Oh, and *how* does the government, which brought us the Department of Motor Vehicles and Post Office, suddenly become capable of all the rapid fine “egalitarian” decision-making required to distribute varyingly to millions of people “to each according to their needs” in a crisis?

    Let’s look at the real world, for a change, to see. When distribution “according to need” is practiced, “need” necessarily is determined by those doing the distributing. Now examinet the real world experiences with real famines, real people actually starving en masse, starting today and going back in time. Two things are obvious…

    1) They never occur in market economies with democratic governments, *always* occur when government and non-democratic, non-market powers direct distribution.

    2) Amazingly, those in the government and in power doing the distributing (after creating the whole situation) and their clients and political allies and constituent groups, and their families and close friends, are always the very ones who are deemed “in need”, and who thus receive ample distributions, while the others starve. Go figure!

    As to the old “rich people” will buy at *any* price for pointless vanity purposes anyhow…

    1) Bullspit caricature of the class warfare mentality. Why would “rich people” pay rocketing up prices approaching “infinity” for plywood or bottled water?? Is that how they got rich?

    2) Who cares? After the rocketed-up price of plywood in Florida gets distributors pouring it down there, Floridians have masses more of plywood.

    With that happening, suppose that my father loved me (or loved model trains) enough to pay the rocketed-up price for the plywood he used in my train layout anyhow, bidding the scraps left here in NY away from other NYers. Because the higher price was *worth it* to him.

    So what? Is that really supposed to be *bad*??

    BTW, anybody really concerned about *real* hoarding in NYC would be a lot less concerned about fantasy millionaires indulging in air conditioned toe-baths as the temperature hits 140 outside and the Hudson turned to salt, and more concerned about tens of thousands apartments hoarded right now by middle class system-gamers under the rent control laws. Start with Congressman Charlie Rangel and his four(!) rent-controlled apartments.

    Rent control itself is an “egalitarian reform” of course, with the purpose of saving housing for the needy. And Charlie is one of the key progressive, egalitarian, legislative driving forces and mavens behind it. And guess who the system decided needed four apartments! Go figure!

    Starting from that example, if a famine was feared to be approaching, would you really want to entrust Charlie to design an egalitarian system of distributing food to each according to his need — believing Charlie will put himself on a much-needed low-calorie diet, to benefit you?
    ~~~~~

    @ Doug M

    “Higher prices will not bring more fresh water to the area.”

    On what world has higher prices ever failed to draw goods?

    “It is a disaster area. If it was easy to bring in water it wouldn’t be a disaster.”

    Note how “not easy” suddenly equals “impossible”.

    Again see how flight-from-reality and bogus invocation of false absolutes and infinities are required to make the argument.

    I do note however, with sadness, that the NJ AG’s office has messages on the radio warning businesses that price gouging is illegal, and warning consumers to steer clear of “‘profit chasing’ contractors from out of state who are coming into NJ purportedly to help you rebuild, but really only to get high prices they cannot get doing honest work at home”.

    Oh, well. At least the AG office is also warning consumers that it doesn’t have the resources to enforce the rules, so they are on their own in the market.

  49. Gravatar of Jimbo Jimbo
    1. November 2012 at 21:26

    Prof Sumner,

    Off topic, but is there any way that market monetarism could be compatible with some kind of social credit system? Can the Federal Reserve increase NGDP by issuing everyone in America dividend checks until the NAIRU rate is hit?

  50. Gravatar of ssumner ssumner
    3. November 2012 at 06:36

    Jimbo, The Fed should stay away from fiscal policy

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