Price gouging seems like a rotten thing to do. There isn’t much written about it from a philosophic perspective, but most philosophers I’ve talked to think it’s a fairly nasty practice. President Bush thinks it’s morally analagous to looting. And it’s illegal in most states. Here in California, for instance, if in the wake of an earthquake I were to sell bags of ice which I normally sold for $2.00 per bag for $2.20 per bag or more, I would be guilty of a criminal offense punishable by up to one year in prison and a $10,000 fine. Yikes.
But what’s so bad about price gouging, anyway? It’s usually a consensual exchange. And not even the kind of questionably consensual exchange involved in, say, sweatshops. No one ever charges that gouged buyers are lacking relevant information or acting irrationally in some way. People in Florida in the wake of Hurrican Wilma were willing to pay $900 for generators because they needed generators, not because they were tricked in some way.
But maybe that’s just the point. Gouging victims often need the items they’re buying. And gougers know this. And they jack up their prices to take advantage of that need. That looks an awful lot like exploitation, and that seems wrong.
I’m not so sure, though. Consider the following points.
(1) If it’s exploitataion, it’s still mutually beneficial exploitation. People who buy generators at $900 a piece are benefitting from the transaction, relative to a baseline of no exchange. The gougers benefit too, of course, and maybe more than we think they ought to. But still, the gougers are doing something to make the disaster victims better off. And what did you, gentle reader, do to help the victims of Hurricane Wilma? If you’re like me, you did nothing. Are we morally guilty? We don’t draw anything like the heat that price gougers do. But it’s hard to see how a gouger who does something to make disaster victims better off can be worse than someone else who does nothing. A puzzle.
(2) There’s a lot to be said for allowing prices to adjust freely in response to changes in supply and demand. A lot to be said morally, even — not just in some cold-hearted economist’s sense of ‘efficiency.’ Prices provide a way of rationing scarce goods in a world of very un-scarce demands. If you’ve got a truckload of ice and a city of people with no power, you’re going to have some people in your line who want ice to keep their beer cold, and some who want it to keep their insulin cold. Selling it for $2 per bag probably isn’t going to get the former to step out of line. Selling it for $12 a bag might.
(3) Moreover, rising prices don’t just serve as a rationing mechanism, they also, as Hayek has pointed out, serve as a signalling mechanism. Rising prices for generators in Dade County send a signal that Dade County needs generators – and that there’s a hefty profit to be made in getting them there. The $900 price tag thus serves as a signal for people to buy generators for $500 in North Carolina and bring them to where they’re needed. As more people do this, the supply of generators in Florida moves closer to demand, the price of those generators moves down, and a new equilibrium is approximated. The lesson: price gouging is not just a static event, it’s part of a larger dynamic market process.
So what’s the problem? As far as I can tell, no philosopher has written either directly criticzing (or defending) price gouging. The ideas here are from a paper I’m working on, currently for submission to the Pacific APA. Have I missed some obvious arguments against the practice? Or does anyone know of some decent literature directly on the topic — by philosophers, that is. There’s lots of good material out there from lawyers and economists.