Monday, September 18, 2017

The high costs of cheap goods and cheap talk

Reports of price gouging have come fast and furious in the wake of the recent devastating hurricanes affecting areas to our South and Southeast. These reports have led to threats from politicians and social media outrage. You shouldn’t get behind this.

Start with this question: what should we say about the following people?
1. In response to the series of hurricanes brutalizing Gulf Coast areas, Smith rents a U-haul and fills it with bottled water, generators, pre-paid cell phones and other supplies. She drives through the ravaged areas and gives these all away to victims, free of charge. 
2. Jones also rents a U-haul and fills it with these supplies. She also drives them to these areas, but sells these supplies to victims either at cost or at their “normal,” pre-disaster prices. 
3. Johnson does the same, except she decides to sell these goods at supernormal prices considered “exorbitant or excessive.” People still readily buy them because they need them so badly.
I suggest the following ranking: Smith is extremely generous and praiseworthy. Jones is less so, though still quite generous considering the sacrifice of her time and effort; Johnson isn’t morally praiseworthy at all.

Some go further and condemn Johnson as a gouger, without any sense of conscience. And, as Texas Governor Greg Abbott said in one news conference, “price gouging is not only reprehensible, it’s illegal.”

For example, Florida law makes price gouging punishable by fine of $1000 for every violation up to $25,000 each day. Fines are bigger in Texas. There Johnson could be fined as much as $20,000 for a gouging offense. If Johnson’s Texas customer happened to be aged 65 or older, the top fine goes up to $250,000.


There are two points to make about this condemnation of Johnson. First, behold the high costs of goods artificially kept cheap.

Keeping the sticker price of something low doesn’t mean you will keep costs low. Waiting a long time for it and, worse, going without it are also costly and probably a lot less efficient way to economize on its use than allowing the price to surge. A friend during the evacuation in Florida was headed up the panhandle with ¾ of a tank of gas, but stopped to fill up “just in case.” He might have decided differently if gas prices were $6.80/gallon instead of $2.80. 


If he had, this would have meant available gas for someone with a tank at or near empty. 

Also, limiting consumption with lines or empty shelves doesn’t do enough by itself to instigate the sort of intense and focused supply efforts affected areas need. Say what you want about Johnson, but like Smith and Jones she is bringing stuff people need where they need it. Others motivated by the profit opportunity might do so as well, which is what we should want.

This leads to the second point. It’s instructive to add another point of comparison relative to Johnson:
4. When Robinson learns about the devastation brought to Gulf Coast areas, she logs into Facebook to write a heartfelt post: “Thoughts and prayers for all the victims of Harvey and Irma! 😭 ”
Comedian Anthony Jeselnik has argued that the sentiment here roughly translates into "don't forget about me today." Even if that’s not quite correct, this kind of talk is cheap and worth much less than what Johnson does. So, it’s perverse to condemn Johnson but like Robinson (or “like” his status update). Again, maybe Johnson isn’t praiseworthy, like Smith and to a lesser extent Jones are, but at least she does that without which people would be significantly worse off.

And let’s make this more personal. I didn’t rent a U-haul and deliver supplies to hurricane-affected areas. I didn’t do it free of charge or at any price. Did any of you? How much money would it have taken to inspire you to deliver needed supplies to hurricane victims? Would you have done it in exchange for the actual costs, like Jones? No, right? Would you do it in exchange for $5000 or $10,000 over your actual costs? No? Johnson (or “gougers” like him) did, despite legal threats.

In that case, even worse than Robinson is:
5. Williams condemns “price gougers” and uses her political influence to back a law punishing them.
Kyle Swan
Department of Philosophy
Sacramento State

19 comments:

  1. Kyle, thanks for this. I feel like your point about Johnson ultimately is that he may not seem like a very nice person, but in the end he may be quite a bit more morally praiseworthy than you or me (which, of course, may not be saying much.)

    It's even easy to imagine that he is a very morally praiseworthy person depending on other factors you had no space to consider. After all, he is extracting money from people who can afford to pay, and that money could be used to help others who can not. It's proper that the relatively well-off in an affected area should help those who are in really bad shape, and this could be an excellent mechanism for finding out who they are. Of course, if I know Johnson, that's not what he's up to, but it still shows that my low opinion of him is based on more than your description.

    By the same token, it's easy to imagine that Smith is quite a lot less praiseworthy than she seems, especially if she ends up giving supplies to people who can afford to pay for them at the expense of people who can not. (Assuming her supplies are limited) Its likely that she will end up giving them to people who turn around and pull a Johnson anyway.

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    1. Right, I was imagining that Johnson's primary concern was making buckets of money for herself. No one, not even Johnson, is asking that people have a high opinion of her. I don't think Johnson is praiseworthy at all, but she does more to benefit others than most. That's true regardless of who she ends up selling to.

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  2. I am all on board with the line I take you arguing for here. It seems to me that if states wanted to help their residents, they would offer cash prizes to the highest price gougers instead of cash penalties, in an effort to flood the market (sorry, "flood" might be an insensitive word to use here) with suppliers of basic goods.

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    1. It might be hard to foresee the consequences of your proposal. Depends on the details. I could imagine a scheme like this being enacted in ways that did much worse than one where the legal impediments simply weren't there.

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  3. I can't help but feel slightly disheartened by this post. If I am understanding correctly, you are trying to morally justify Johnson's price gouging?

    Suppose that the costs *were* higher to deliver the goods for Johnson. If this were the case, then she is not really price gouging at all, and therefore would fall in line morally with Jones.

    Suppose that Johnson were only selling the over-priced goods to the rich that could afford it. While this seems to not be taking advantage of the less fortunate, it still doesn't change the morality of the action.

    Suppose that neither of these are true, and that the reality is just that Johnson has decided to take advantage of those afflicted by disaster. Even if Johnson is bringing goods to a needy area, she is doing so at the expense of others who are probably forced to pay the prices they cant afford, to get the goods they desperately need.

    This action is not made less morally reprehensible by others' inaction (I would even go so far as to argue that Robinson's post is less morally reprehensible than Johnson's). Using a premise like our inaction to pack up a uhaul, seems to me, is a lot like telling someone to "pack up and move" if they don't like the laws and regulations in California/America. Its just not always feasible, nor logical.

    Which follows, for me, that Williams too, is less morally reprehensible than both Robinson and Johnson. Call it a bleeding heart if you want, but I can't agree with moral justification for taking advantage of others.

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    1. Maybe it's a simple empirical disagreement, Kris. If Johnson actually benefits needy people, including poor needy people, that does that mark a morally relevant difference between her action and our inaction. But it sounds like you reject the idea that Johnson benefits needy people. Is that right? The original post explains how she provides significant benefits, though. Could you say what you find implausible about those arguments?

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    2. I suppose it depends on what you mean by "benefits ". Sure, they are temporarily having their thirst quenched, but now they have spent what could have bought 2-10 times as many quenched thirsts. So in the long term, there is no benefit. The "Johnson benefits needy people" argument seems slippery sloped and, if applied broadly, would allow for countless exploitations disguised as "benefits".

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    3. There's no disguise. The post suggests two chief benefits: on the demand side, the increase in prices helps to keep people from over-consuming scarce resources. On the supply side, the increases in prices instigates the redirection of additional supplies to affected areas.

      Also, it's just not the case that buyers have spent what could have bought 2-10 times as much since, without the increase in price, there's nothing on the shelves to buy.

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  4. My initial reaction to your second point was that Johnson is not better than us and not better than Robinson. There is something morally blameworthy in what Johnson did because he took advantage of people by charging them unconscionable prices (“unconscionable” in contract or commercial law may be like “obscene” in First Amendment jurisprudence). You know it when you see it. Including some profit and/or compensation for one’s expenses would not be unconscionable.

    It seems to me that we can separate Johnson’s act in two: (1) selling the goods with some profit and/or compensation for his expenses; and (2) charging an amount that constitutes an unconscionable price.

    I think if Johnson did (1) only, his act would be less charitable than Jones’s, but maybe better than the average person. Your comments would apply to him. But Johnson didn’t do (1) only, he did (1) and (2). He didn’t sell a gallon of water for $4.50; he sold it for $20. At some point, the price becomes so offensive to any reasonable person, it would count as unconscionable.

    I would add that, although the Florida law does not seem to require a showing of intent in the affirmative case (but it does not exclude on its face a showing of innocent intent as a defense), morally speaking, we could separate Johnson’s act again in this way: (1) selling the goods with some profit and/or compensation for his expenses; and (2) intentionally charging an unconscionable price. If Johnson did (1) and (2), he deserves blame. He’s pond scum.

    Even if a person did nothing or simply wrote on her Facebook page “We stand with the victims of Hurricanes Harvey and Irma,” at least she didn’t intentionally harm the victims (even if some of the victims could afford the higher prices, the unconscionable pricing harms them).

    All this to say, there seems to be something smelly about Johnson's act and maybe we can isolate it out as intentionally taking advantage of others in their time of need. 

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    1. I write to defend the post scum.

      More seriously, Chong, I think that your distinction between (1) and (2) resonates with people--it resonated with me, at least for a moment--but then I realized that it contents the seeds of an argument that strikes me as persuasive (and I wonder whether you or Kyle do too):

      1. there is such a thing as a selling a good (say, a gallon of water) for a price (say, $4) that makes a reasonable profit (say, $1).
      2. there is such a thing as selling that same good for a price (say, $20) that is "so offensive to any reasonable person, it would count as unconscionable."
      3. but now, notice this: it's easy to imagine eliminating this difference, gradually, in ways that seem paradoxical:

      3.1 the easiest case:
      A sells to B for $4 at a $1 profit.
      B sells to C for $5 at a $1 profit.
      …and so on, until…
      P sells to Q for $19 at a $1 profit.
      Q sells to R for $20 at a $1 profit.
      In this case, Q only makes $1 profit. A reasonable profit. Q is fine, right? But notice, Q sells at the unconscionable price. Are we really to believe that Q’s sale was wrong?

      3.2 the loop case: same as the easy case, with one twist:
      A sells to B for $4 at a $1 profit.
      B sells to C for $5 at a $1 profit.
      …and so on, until…
      P sells to A for $19 at a $1 profit.
      A sells to R for $20 at a $1 profit.
      Again, A only makes $1 profit, but A sells at the unconscionable price. Are we really supposed to believe that A’s first sale to B, for a $1 profit, was fine, but A’s second sale to R, for a $1 profit, was wrong?

      3.3 the enhanced loop case: same as the loop case, with one more twist:
      A sells to B for $4 at a $1 profit.
      B sells to C for $5 at a $1 profit.
      …and so on, until…
      P sells to A for $19 at a $1 profit.
      A sells to R for $20 at a $1 profit.
      A sells a second bottle to R for $20 at a $17 profit.
      Are we really supposed to believe that the first bottle A sells to B for $20 is fine, but the second bottle A sells to B for $20 is wrong?

      Anyhow, I am strongly inclined to think that I am not discovering something new here—so maybe I’m just repeating a fallacy that’s long been exposed. Or repeating an inconvenient truth that’s long been suppressed…

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    2. Russell,

      In all of those cases, $20 for a gallon of water today in the US is an unconscionable price.

      Profit and compensation for one’s expenses is undefined, but there should be reasonable limits. Let’s say that I too want to help the hurricane victims and decide to fly to Florida. Let’s say that I also think that everyone should drink only Evian water and so I import Evian water from Évian-les-Bains, France. I don’t intend to make any profit, but merely include the cost of the good and my expenses in the price. I charge $50 for a gallon of water.

      This is probably why the statute is a strict liability offense and doesn’t require intent. I sound very pro-regulation, but we’re talking about extraordinary circumstances.

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    3. You will pay more than $20 to get a gallon of water at At&T Park.

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  5. This seems like a simple empirical disagreement, Chong. If Johnson actually benefits needy people, including poor needy people, that marks a morally relevant difference between her action and our inaction. But you assert that Johnson harms the hurricane victims. The original post explains how she provides significant benefits, though. Could you say what you find implausible about those arguments?

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    1. Kyle,

      Even if I grant that Johnson provides some benefit to people in need in the affected areas (I don’t think it’s just about an empirical disagreement), I would still argue that she also harms them. This is assuming that an action can produce both benefits and harms.

      Here are at least two ways that the hurricane victims are harmed:

      (1) From a deontological viewpoint, if person A intends harm to person B, then B is harmed. This is true even if person A is unable to bring his intent to fruition and even if person A also benefits B. As I suggested in my previous comment, intentionally charging an unconscionable price (a price that is categorically unfair or far beyond what anyone ought to pay for the good in question) is an instance of intentional harm. The harm may include the psychological stress of having to make hard choices: pay for water for my family now versus have enough money to pay the rent next month. Or, better: the harm may include the knowledge that someone is taking advantage of you (and you can’t do anything about it).

      (2) As a deontological critique of utilitarianism, some poor people will suffer more by price gauging and the net benefits to those who need the goods in the affected area does not adequately account for this. Martha Nussbaum raises a similar critique against utilitarian measures of well-being in developing countries. If Johnson’s bringing goods into an area raises the social utility in the area by 100 utils, the net social utility may seem to justify Johnson’s act. But when you look more closely at the distribution, you may find that there are ten individuals (obviously simplifying here): two (people who couldn’t care less how much they pay for water) that benefit by 45 utils; five (the average working class Joe and Jane) that benefit by four utils; one that experiences zero net difference; and two that are harmed by five utils. Yes, Johnson benefited the people in the affected areas by bringing them what they need. But two people now will not be able to pay their rent next month.

      I also suspect that (and I’m no economist), in times of crisis, during which there will never be enough goods in the market to meet the demand, the seller can basically charge whatever he wants and people would be forced to pay it unless there are some price controls. Mechanisms internal to markets may work, but not enough to correct for this.

      I entirely agree with you about real costs of artificially keeping prices low, but I also think there is good reason to regulate prices from getting far too high in times of crisis.

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    2. (1) looks weird both as a principle/analysis of harm and as it applies in these kinds of cases. First, your principle suggests that A could harm B by giving B things B wants if A had weird enough empirical beliefs. We should reject any view of harm on which things that don't harm count as harms. Second, people labeled gougers aren't typically intending harm at all. Johnson just notices that people need stuff and makes a decision about what would make it worth her while to get it to them. I agree this could cause the harm of psychological distress associated with making hard choices. But first, people labeled gougers (or pond scum) still provide *net* benefits because having stuff available to make hard choices about is better than not having it available at all. And second, notice that someone charging any price for anything will cause this harm.

      (2) looks like it misunderstands the economic argument. No one suffers more by price gouging. They're already suffering because of the hurricane and price gouging makes the best of a terrible situation. Many, and eventually all, are made better off by the rising prices. You seem to recognize this in your last sentences, but people will be worse off to the extent any proposed regulations prevent prices from rising high enough to do the job that we need price signals to do in a time of crisis.

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    3. I suppose I don't see the net benefit after the dust settles (or the water recedes) when the family is out on the street and can't afford to pay rent anywhere. I also think, in evaluating harm and suffering, despite the overall economic benefits of good, even high, prices (which is different from unconscionable prices), the worst off in society is harmed. We can attribute some harm to the hurricane itself. We can even attribute the harm of paying higher prices to supply/demand and the need/desire of retailers of making a profit. But there's an aggravated harm (or additional harm) caused by price gougers and it is this harm that I'm trying to isolate and call out as blameworthy. Pond scum.

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    4. The post suggests two chief benefits: on the demand side, the increase in prices helps to keep people from over-consuming scarce resources. On the supply side, the increases in prices instigates the redirection of additional supplies to affected areas.

      These are obviously benefits on net since if these things don't happen it's not as if the worst off could wind up any better off in terms of access to needed goods. So you'd have to think that this mystery harm you refer to is worse than more people having more needs unmet.

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  6. Hello Professor Swan,

    Your argument is compelling, and I have been compelled on the account you have given ;). But I wonder if the account you are giving is a bit padded, maybe dis-analogous to what has been going on.

    Leaving aside the second half, isn't it actually the case in the instances of price gouging that the 'gougers' are inflating prices of products which were already there, already going to be sold at lower cost, and that they have little/no intention of redirecting resources to those in need? Since they have been gouged, won't these people actually be in a far worse position to get the things that they need in the future (severely reduced incomes, and severely reduced net worth), and so be unable to offer market incentive for the resources to stay at even the supply level they were at? It seems to me that the gougers capitalized on a kind of instantaneous market externality and in doing so are actively pushing the ability to procure necessities out of peoples hands.

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    1. Well, wonder no more, Stan.

      Yes, some 'gougers' are unlike Johnson in that they, with their various goods and services, are already there. This doesn't affect the argument, though. It's still the case that raising the prices serves to encourage consumers to exercise restraint. The woman in the picture above got to the water isle first and filled up her cart ("just in case") because the price didn't rise (or rise enough) to make that choice harder. She might end up using some of that water for her plants, or end up just putting it in storage, while someone who came later has to go without.

      Also, it's still the case that people already there increasing the prices of goods and services already there will serve to signal others (like Johnson!) elsewhere that there are opportunities to be had if they would bring stuff people need.

      Yes, 'gougers' are capitalizing on (not a market externality, but) an exogenous shock, but in doing so they are bringing it about that more necessities will make into more people's hands.

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