With price gouging, morality trumps economics
Much about the pandemic sweeping across the world is
unprecedented, but one aspect is all too familiar: price gouging in the
wake of a disaster. In New York police arrested a man who had
stockpiled medical gear, allegedly selling it for a 700% mark-up.
Indonesian authorities seized 600,000 masks from hoarders. In Italy
the government launched a probe into sky-high online prices for basic
protective equipment. Such crackdowns are popular. Who could
possibly endorse disaster profiteering? Many economists, as it turns
out. To be clear, it is not that they want the public to miss out on lifesaving products. Quite the contrary. They believe that soaring prices
stimulate greater output, and that policies to cap costs might limit
supplies and so do more harm than good. In 2012 the University of
Chicago surveyed 32 eminent economists about legislation that banned
price gouging during a weather-related emergency. Only three
supported the ban; more than half criticised it. Similar views have been
aired in recent weeks. An economist with the Cato Institute, a
conservative think-tank, lamented the “madness” of anti-gouging rules,
saying that profits are what entice firms to meet rising demand for
safety equipment.
Yet a closer look at one key piece of equipment—masks—during the
coronavirus crisis shows that this standard view needs revamping.
Economists are normally loth to tamper with prices, the most basic
element of any market. But little about this pandemic has been normal.
Price signalling alone would have been inadequate to the challenge of
ensuring vast increases in supply.
First, consider the manufacture of masks. They might look simple, but
producers need sterile factories and sophisticated machinery to churn
out melt-blown fabric. Upfront costs would be hard to justify if the
virus were quickly snuffed out. So in January, the early phase of the
outbreak, Chinese firms began by scouring the world for masks rather
than by making more of their own. It took government action to
change that. Officials offered subsidies to firms producing safety gear:
promising not outsized gains but an avoidance of losses. China went
from making 20m masks per day before the crisis—half the world’s
output—to nearly 120m by the end of February.
Profit, narrowly defined as the income earned from making masks,
also fails to explain corporate motives. Regulation has been crucial.
Companies in China could not resume operations until all their
workers had masks, so automakers, phone manufacturers and oil
giants all added mask-production lines. And big companies also want
to look like good corporate citizens. Peter Navarro, a trade adviser to
America’s president, accused 3m, one of the world’s biggest
manufacturers of high-end masks, of putting money before people. In
fact, 3m has stuck to its list prices and doubled its production.
Pricing is usually the best way to allocate resources, by revealing who
is willing and able to pay for something. But there is no doubt now that
masks are most essential for medical workers. Ordering large supplies
at fixed prices is the right policy. The public benefit of a functioning
health system far outweighs any harm in impeding sellers from
maximising their profits. This was a point made to the University of
Chicago’s survey by one of the dissenting economists, who argued that
it was fair to cap prices after a natural disaster. “Efficiency is less
important than distribution under such transitory conditions,” said
Angus Deaton, now a Nobel laureate. In a global health crisis, his
argument is even more compelling. Conventional morality—the
revulsion against price gouging—trumps conventional economics. ■please write an counter-argumentative essay against this article