Like a TV series, I feel obligated to begin this post with a synopsis of my last post since this is a three-parter. My overall objective is to consider two intriguing current issues – price gouging (this post) and net neutrality (next post) utilizing an Arthut Okun-influenced economic framework for considering important public policy issues (previous post).
So here goes. “Previously on Garygrams:”
A capitalist system uses market-clearing prices, and the ability and willingness of buyers to pay those prices, as the primary criteria for rationing scarce goods and services. . . . . While the allocative result is efficient and socially beneficial, the morality of using what Okun calls ‘dollar votes’ to determine what is produced and who gets what is left unanswered.
But what if some ‘event’ significantly and quickly changes the openness of markets and the demand urgency of some individual buyers? That’s essentially what happened most recently when Hurricane Irma set its sights on Florida. Numerous reports surfaced of price gouging in the form of $20-per-gallon gasoline, $12-per-bottle water and $3,200 for a Delta ticket out of Florida, followed by predictable expressions of moral outrage and calls for price controls from both defenders and critics of free markets.
As is often the case, however, the reality is more ambiguous. It turns out, for example, that the alleged $3,200 airline ticket price wasn’t actually hurricane-related price gouging at all. Airlines have been charging similar ‘peak-demand’ fares to last-minute buyers for years by basically segregating such buyers from the remainder of the market. So whether for weather, family, business or any other compelling circumstance, some affected buyers are suddenly willing to pay almost anything to buy a seat on the next plane. To a much lesser extent, the same is true for Uber’s surge pricing, Amazon’s data-driven repricing scheme, drastically elevated hotel rates during major events or even in-season vs. off-season pricing at many vacation spots. In all these instances sellers are able to segregate buyer groups based on demand (or elasticity of demand) changes and thereby charge more buyers something close to their reservation price.
But what if any are the moral implications of these pricing policies? To the general public these practices often seem outrageous, but to many economists they are acceptable and even beneficial. To them, recall that market-clearing prices (mcp) act as the primary rationing device in a market economy. This is no less true when something suddenly becomes much more scarce (or in higher or more urgent demand) due to a market-shocking event. And it really makes no difference whether that event is a weather emergency or heavy hotel demand due to the Super Bowl. Remember, the market allocation and distribution processes are perceived as amoral.
Moreover, according to free market economists, adopting price controls to eliminate or lessen gouging will actually worsen the problem by removing the incentive to conserve. Consider for example a hotel that normally charges $75 per room, but which raises the price to $200 during a weather emergency. A large family that might have rented two rooms at $75 will likely choose to put everyone in one room at $200, and a family whose home was damaged but livable would be more likely to stay at home with a hotel cost of $200 as opposed to $75. In either case the higher price encourages economizing and actually frees up rooms as compared to the low price.
And if for example the price is capped at $75 by law, what’s to prevent a black market from arising where an unscrupulous customer purchases a block of rooms at $75 and then resells all but the one he uses at $200? More generally, prices capped below the mcp reduce supply. A Georgia supplier of bottled water would have a tremendous incentive to quickly get trucks moving to hurricane-ravaged Florida if the price rose to $12 per bottle, but little incentive if the price was capped by law at $1.
So are these economists right and bleeding heart price-cappers misguided? Yes and no. The economists are right that all sorts of ‘events,’ from the popularity of the Broadway musical Hamilton to the threat of a devastating hurricane, increase demand and demand urgency, which inevitably drives up the mcp. They are also right that capping prices below the mcp creates unintended consequences such as black markets and requires rationing the increasingly scarce commodities and services in some other manner (hello queues).
But lets think just a bit more about the magic of rationing scarce stuff through prices alone. What determines who ultimately gets the stuff is not the mcp, but rather the ability and willingness to pay the mcp, i.e., what Okun calls dollar votes. That may be morally acceptable as well as economically efficient when we’re talking about doubling the Uber rate in Times Square on New Year’s Eve. Some folks may not be willing or even able to pay the higher rate, but then again their personal well-being is not dependent on an expedient trip home. But when markets for essential goods and services are disrupted by natural disasters or quasi-monopolistic providers (big pharm, I’m looking at you), survival may become paramount. Under these circumstances allowing dollar votes alone to determine who gets scarce life-saving products and services is morally unacceptable.
Therefore using Okun’s conceptual framework, I would conclude that the basic availability of essential life-saving goods and services should be guaranteed to all under the domain of rights, rather than being rationed by ability to pay in the domain of dollars. Of course what this implies as an optimal public policy is much more complicated. But one thing is certain – price controls do not constitute a departure from the domain of dollars, but rather a simplistically ineffective subterfuge for remaining there. So simply prohibiting price gouging by law is not the answer. Removal of essential-to-life goods and services from any marketplace is required, with their provision guaranteed by government just as is, for example, K-12 education. Okun’s bottom line is that “the market needs a place, and the market needs to be kept in its place.” Uber and Marriott rates fall within that place, but disaster survivability clearly does not.
Garygrams 
I agree that there are many times when relying on the market is unacceptable. For example, drug companies price discriminate most of the time. Is it fair to ration life-saving medications for people who cannot afford them? Of course, there are many instances where the market price is too low and state and federal policymakers provide subsidies (e.g., minimum wage laws and farm subsidies).
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