Reason Interviews

Michael Munger Says 'Price Gouging' Gives Us Information We Need

Such laws end up causing more shortages than they solve, especially during a crisis.

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As the COVID-19 pandemic prompted shoppers to clear supermarkets of toilet paper, rice, and canned vegetables, Matt and Noah Colvin loaded up a U-Haul with all the hand sanitizer and antibacterial wipes they could find, then attempted to resell the goods on Amazon at a massive markup. Soon after, the online retailing giant banned the practice, state attorneys general started cracking down, and the Colvins were shamed into donating the items.

But is so-called price gouging always a bad thing? Reason's Nick Gillespie spoke via Zoom with Michael C. Munger, who teaches economics, political science, and public policy at Duke University, about what happens when governments mandate that the prices of scarce goods be kept down. Munger says such laws end up causing more shortages than they solve, especially during a crisis.

Q: You are an unapologetic defender of price gouging. Can you explain why?

A: It's not clear that I would defend price gouging in all instances. Much of what we call "price gouging" is a guy telling an elderly person, "This tree in your yard is going to fall down. We'll cut it for you for $300" and then [giving him or her] a bill for $2,000. Much of what is enforced as price gouging is, in fact, fraud.

So let's take out fraud and recognize that we're in a circumstance of really great scarcity, and let's think about what the price mechanism does. If the price of something goes up and there's a shortage, three great things happen: The first is that consumers buy less. They look at that price and they say, "You know, somebody else must need this more than I do," and so they leave some for the person behind them. The second thing is that producers try to find ways to make more. And the third thing is that entrepreneurs try to find ways to make substitutes.

Q: But people were like, "There is a good chance we're going to be told not to leave our houses again. There is a good chance that trucks are not going to be replenishing grocery store shelves. We went to buy toilet paper because we don't know the next time we'll be able to." What are consumers supposed to substitute for toilet paper? And how long does it take a place that makes computer paper to switch over to making toilet paper?

A: The premise of your question is: Suppose you're in a situation where the things that I've talked about are unlikely to be able to happen. If this is really all that we're going to have [of something], and we're trying to allocate a scarce resource among a bunch of people who want it, then it seems like a pretty good objection [to price gouging] that only rich people can buy it. If there's a circumstance where this really is all there is, I can see an argument for some other mechanism for rationing.

On the other hand, you can still go to the grocery store. And if you've been to the grocery store lately, at least in Raleigh, where I live, there's plenty of toilet paper.

Q: What were your first thoughts when you heard government officials saying, "We have to impose price controls immediately." 

A: I think from a political perspective it was a genius move, because they can't do anything that actually helps [fight] the virus or [provide] access to health care. They don't have enough testing kits. They screwed this up. What they can do is say, "We're going to protect people against price gouging."

My own senator, Sen. Thom Tillis, told me to my face, "I'm a libertarian." Yet Thom Tillis has introduced a piece of federal legislation to outlaw price gouging. Not only does that ignore the 10th Amendment, it also ignores the fact that not all states are equally affected by this. Some states really are desperate for some of these items. High prices say, "Bring it here. We need it more than you do."

Q: From a libertarian perspective, what is the role of the federal government in a situation like this pandemic? 

A: We're going to be able to talk about this for the rest of my life in class. I don't know the answer to your question.

Q: Come Christmastime, where do you think we'll be as an economy? 

A: We're going to test a lot of the theories that Keynesians have about ways to try to spur the economy. We may see a big increase in the rate of growth of the money supply. We may see a bunch of fiscal policy. And we're probably going to get one or more of those things wrong. So: a big increase in debt or a big increase in inflation.

This interview has been condensed and edited for style and clarity. For a podcast version, subscribe to The Reason Interview With Nick Gillespie.

NEXT: Matt Ridley on How To Beat the Next Pandemic

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21 responses to “When 'Price Gouging' Is Good: Michael Munger

  1. Just like the oil shortage in the late seventies.
    When the OPEC-ers shut off the flow, the price of gas went up, but it was still available.
    Then the feds stepped in with price controls and the lines formed the next day.

    1. +1000

      This is 99% government’s fault. Price and wage controls. Anti-hoarding controls. Extending unemployment benefits to promote not working. Lockdowns.

      1. I keep seeing memes about how this is a failure of capitalism. I hope it’s some kind of reverse psychology and that people aren’t really that dumb.

        1. It’s not. They are that dumb. It’s called confirmation bias.

  2. Some grades of crude are at negative pricing right now because it’s cheaper than storing it.

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  3. This is why Bernie and his ilk are so popular, John Rawls wrote a whole book on it. Equality in poverty is preferable to inequality in wealth, a society where everybody makes $20,000 per year is better than one where 90% of the people make $50,000 and 10% make a million and most people are perfectly willing to cut off their nose to spite their face as long as everybody else is cutting their noses off as well.

    1. No they are not willing to be poor. They SAY they are but when it comes down to poverty, most Americans don’t want anything to do with that.

      Even poor people have to have a cell phone.

      It’s more ignorance of what they think Communism and Socialism can get them. The dum-dums believe that Socialism will raise them up when they take wealth from others. The are too stupid to read history and find out that everyone is poor except party bosses. Even Gorbachev was shocked to see American stores with groceries. Russian party bosses could not even get that kind of wealth.

  4. So the FBI, yeah the feds, went after some dude who stockpiled a bunch of N95 masks and tried to sell them at a huge markup. I wondered what law he broke. He was charged with not having a wholesale license. WTF? This is why the FBI raided him? Fucking ridiculous.

    1. The articles that mentioned it said the government will be paying him “fair market value” for the supplies, so of course he didnt break any constitutional law. Otherwise they would have given him no compensation.

      They are not going to give him just compensation as required by the 5th Amendment.

  5. There is no such thing as “price gouging”; that’s propaganda invented by econ-ignoramuses in the hopes of coercing price-fixing.
    Any price freely agreed upon between a buyer and a seller increases the wealth of mankind.

    1. Yes. And more importantly, prices are signals that allow supply to keep up with demand. Want more masks and respirators? Increase your bid.

  6. Price gouging is a meaningless term. If someone is overcharging, people won’t buy. If market conditions dictate an increase in price, then that’s basic economics.

    Unrelated – I’m back again after another extended absence. It looks like Reason remains in full TDS mode, and their biggest complaint is that el presidente isn’t authoritarianing hard enough.

    1. +1000

      Welcome back.

      TDS is still the order of the day for unreason and they have added in KungFlu hysteria.

      Another funny thing is that most of the unreason staff are cooped up in some city somewhere scared shitless. They think the rest of America is hiding in their safe space too, so most of the articles skew that direction as if Americans are actually complying with this hysterical nonsense by the media and state governments.

  7. I agree that government controls aren’t the solution for this.

    Is there not also room to disapprove of hoarders who create artificial scarcity? If you’re hitting up multiple stores to empty their shelves of hand sanitizer, suddenly there’s a local shortage of hand sanitizer. In time, a big healthy market will correct that by producing more hand sanitizer and redirecting shipments to that area. In the short term, someone is potentially creating a panic in order to profit.

    There’s a difference between letting the prices inflate naturally to let the market correct, and in letting individuals be exploitative in artificially raising prices.

    1. Well if individuals raise prices in response to expected demand (“gouging”) it prevents the hoarder from cleaning out all the shelves, so even though the next person pays more at least there is something on the shelves

  8. I agree that the government controls and should do that
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  9. Don’t know why there is an assumption that those price changes will necessarily lead to changes in supply. It just ain’t true – and this current pandemic is proving that many of those assumptions just ain’t so.

    Sure – you can raise the prices for say masks that are held in inventory in a particular location. And that will help maximize the value of that inventory. Hell, you can even do what the Colvins did and round up existing inventory in order to distribute it somewhere else.

    But it doesn’t mean the inventory will replenish itself – if eg the only place that produces the product is halfway around the world and won’t be sending you any anytime soon – and there isn’t going to be any increased production of any scale because barriers to entry have been created re the established. Nor is there the remotest direct connection that said inventory produces a better outcome if stored and profited from by the private sector rather than by some muni/govt stockpile.

    Now maybe there will be workarounds re some stuff – eg ‘ladies who still craft and sew’ will make some washable cloth masks that will garner a CDC ‘seal of newly-announced approval’. It has yet to be seen whether that will work at all re 3d printed open-source ventilators. And it certainly doesn’t apply to something like TP – where no one in their right mind will believe the hoarding is a sign of increased demand in future.

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  12. Usually price increases of basic necessities after natural disasters. accesselitenow.com/