Fri, 25 Jul 2003

The 1998 ice storm

In 1998, Northern New York had an appreciable ice storm. Nearly everyone lost power, some for as much as a month. The power grid was lying on the ground, for the most part. We were lucky, as my wife insisted that I buy a generator before the power went out. We bought the last generator that Leberge and Curtis had in stock.

In any situation like this, where demand greatly exceeds supply, the price is going to rise. This is "duh" economics. But legislators (generally the villain in these writings) don't like this price rise. They call it "price gouging", as if the supplier were intentionally raising prices.

The reason the supplier raises the price is not to profit from anyone's distress. They raise the price for two reasons: because the thing they currently own is more valuable (so why shouldn't the price reflect the value?) and because the thing they currently own is more valuable (so why shouldn't it go to the person who values it the most?).

Given a limited supply of generators and too many people wanting them, how should Leberge and Curtis allocate them? Should they hold onto them, and only sell them to valued customers? Should they sell them at the usual price? Should they allow the price to rise to the market-clearing value? There must be some allocation system. Some people who want generators are going to have to go without. No allocation system is completely fair; welcome to reality.

I argue that the price should be allowed to rise. There are several sublime advantages to letting the free market do its thing.

Some people argue that it's not fair for one person to gain from another person's suffering. This is a ridiculous idea, of course. If you starved yourself all day long, so that you were suffering from extreme hunger when you went into a restaurant, should that entitle you to a discount? I don't see how it's any different just because you didn't choose to suffer. Life is full of vicissitudes.

Still, a lot of people accept that argument, and they insist that prices be controlled in a disaster situation. They say that naturally, helpful people will bring generators to the North Country. Sure. No question of that. Except that helpful people are probably already helping someone else. It's not like they're sitting around saying "Hmmmm.... there are no disasters right now, I think I won't be helpful to anyone." They need to be persuaded to drop what they're doing and go help someone else. The profit from the higher prices is the persuader. Only ... when the prices aren't allowed to rise, fewer helpful people help. This is the effect of marginal value.

Still, they're making unconsionable profits, aren't they? Well, maybe not. If the price shoots up very quickly, perhaps too many people will be spurred to action? In that case, there will be many generators, and generators will be real cheap. There's always risk in seeking profits. Sometimes you lose money, instead.

Still, let's say they are making these profits. Is there anything too terrible in allowing helpful people to have some extra money? Probably not, but what about the people who feel only greed? Shouldn't evil be punished? Only in cartoons is anybody wholly evil. Anybody who busts their butt driving a truckload of generators is going to be doing it for multiple reasons. One of them is profit, sure. The other is pride in helping stricken people. Profit, pride, profit, pride go the thoughts, round and round.

The faster the demand goes away, the better, from a public policy point of view. This isn't going to happen unless everybody who wants a generator gets one. The best way to make that happen is to allow prices to rise.

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