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Covid-19 has led to a number of shortages. It has also, as a consequence, produced an epidemic of price-gouging. 1/ https://www.nytimes.com/2020/03/27/us/coronavirus-price-gouging-hand-sanitizer-masks-wipes.html
Crucially, the Trump administration’s refusal to make serious use of the Defense Production Act has left states competing with each other for critical medical supplies, from ventilators to personal protective equipment, leading to soaring prices. 2/
But is price-gouging in the wake of a disaster bad? Most people instinctively feel that it is — that those who happen to be in possession of crucial supplies in a time of extreme shortages shouldn’t be allowed to make a killing by selling those supplies at very high prices. 3/
To the extent that economists have thought about it, however, they tend to argue that we should let markets work, that putting a lid on price increases is counterproductive. 4/ https://www.latimes.com/business/hiltzik/la-fi-hiltzik-price-gouging-harvey-20170828-story.html
There seem to have been very few attempts to think through why, exactly, most people feel that price-gouging is bad; this is one of the few examples I’ve been able to find. https://www.jstor.org/stable/pdf/27673275.pdf?casa_token=YmwgA1lw5skAAAAA:ZAiStyMcibANzt4lHuqGMw6IwziLrQTYGgXLY2MDoJDMvwbYqq-KOPU8ZMMkuXFhGhlP0SHL07NvZh60wZmcmygwOcbqAnLDovADqCyDbSbPxy-ebdkM But I’d argue that the public is right and many (most?) economists are wrong.5/
The piece linked above makes the case in terms of the morality of the seller’s actions: is it right to take advantage of peoples’ distress? Without disagreeing that this is a relevant question, I find it helpful to think in terms of distributive justice. 6/
The classic argument here is that of Rawls, who argued that we should evaluate social arrangements by imagining ourselves having to choose institutions and policy behind a “veil of ignorance”: what society would you prefer if you didn’t know who you would be? 7/
If you assume that we’re going to need to rely on a market economy, a Rawlsian approach doesn’t prescribe complete equality: in reality, people do know who they are, and must be given incentives to produce. But it does say that you want a strong safety net 8/
paid for with progressive taxes, because the assurance that you will be able to afford essentials if you end up poor matters much more than how much luxury you’ll be able to afford if you end up rich. 9/
Suppose, however, that we already have progressive taxes and a safety net — that we have, in effect, made our choice about how much inequality to have — and then disaster strikes. How does this change things? 10/
Answer: if disasters are followed by a free-for-all, with very high prices for essentials, the stakes of inequality become much higher. Those who can’t afford high prices face extreme privation, even death, while those with sufficient wealth face no more than inconvenience. 11/
Compare this with a regime in which disasters are followed by temporary price controls and rationing of essentials based on need. If you had to decide between these regimes ex ante, behind the veil of ignorance, which would you choose? 12/
The answer, it seems clear, is that you’d choose rules of the game in which profiteering and price-gouging in the aftermath of disaster are prohibited. You really don’t want a society in which low income means death in times of disaster. 13/
So even if you believe that the best system for normal times is to let markets rip and soften the impact of inequality with taxes and transfers, it makes sense to temporarily move to price controls and rationing in the face of disaster. 14/
Maybe rules against price-gouging hurt economic efficiency in the sense that they reduce the sum of consumer and producer surplus. But economics is about people; and human welfare sometimes requires looking beyond dollars and cents. 15/
