Becker and Posner Mull Price Gouging

Over at the Becker-Posner Blog, the resident luminaries have gotten around to discussing the problem of whether and when to punish “price gouging” after natural disasters. Judge Posner makes the expected moves (“sheer ignorance of basic economics”; “[t]he only beneficiaries will be people with low costs of time and nonurgent demand”; “higher prices for gasoline are a source of substantial external benefits”.) However, he does concede that price gouging regulations might be appropriate under two types of circumstances.

First, he acknowledges a possible “rare situation in which the consequence would be an intolerable gap between wealth and welfare.” In layman’s terms, this is the Judge’s concession that wealth sometimes is a bad proxy for aggregate happiness, and that allocating scare goods to those most able to pay for them can lead to net losses in utility.

I am interested in whether there is empirical support for Judge Posner’s intuition that such situations are “rare”. I am particularly dubious of the Judge’s resort to the old argument that excess profits might be taxed and then redistributed. I’ll believe it when this Congress imposes a special tax on Exxon’s heaping profits over the last year.

Second, Judge Posner distinguishes ordinary price raises by gas stations from opportunistic profit taking. He refers to the distinction between natural scarcities and artificial ones (citing Alaska Packers v. Domenico, a great contracts case about modification and duress). In the latter situation, Posner argues that intervention might correct for inefficiencies resulting (I take it) from transaction costs; while the former (natural and unexpected) windfalls should be left where they fall.

[Incidentally, for my students who read this blog, Posner’s distinction here is identical to the one he makes in the efficient breach context.]

I’ve addressed this topic before (here and here). The smart commenters to my posts convinced me that the gas station example is a particularly tough place for defenders of price gouging regulation to make a stand – which is why I’m a bit disappointed that Judge Posner didn’t take on price gouging regulations in the much harder hotel context.

I’m also somewhat surprised that Judge Posner didn’t discuss the enforcement mechanism of these regulations, and the relationship between price gouging and the little-FTC/unconscionability standards. I have been unable to find any good studies of the deterrent effects of anti-gouging statutes on gas station price-hikes versus, say, hotel chains. Now, both Posner and Becker might argue that thinking about deterrence doesn’t matter if the activity in question should always be encouraged, but I don’t think that is really their claim.

In sum (and I was going somewhere with this post!), these two leading legal economists are just too quick to dismiss price gouging regulation as inefficient demagoguery.

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3 Responses

  1. Joe Miller says:

    I enjoyed Steve Shavell’s recent paper on the topic. It’s entitled “Contracts, Holdup, and Legal Intervention.” You’ve probably already seen it. In any event, one can read the abstract and download the paper here.

  2. Paul Gowder says:

    I still think Posner’s just flatly wrong about the gas example. Price gouging only acts to ration use if elasticity of demand is high. Gasoline, being a necessity in the most normal times and an urgent necessity when one is e.g. trying to flee a hurricane, is going to have low-ish elasticity of demand. So people will buy just as much (or almost as much: they might skip a pleasure trip or two) gas notwithstanding the price increase. This is supported by the huge precentage profit increases of all the gas companies last quarter, which were easily as high as the increase in the prices, suggesting that prices and profits increased in a direct relationship. If people bought significantly less gas because of the “rationing,” you would expect profits to not increase so much.

  3. Paul Gowder says:

    Oh, also, I’ll bet my bottom dollar that if anyone actually proposed an excess profits tax, Posner and his econobot buddies would oppose it. Because, after all, “a rational company would anticipate the excess profits tax and undertake no efforts to supply extra goods in a disaster.” Yada yada yada etc.