Alright, this is hilarious. Or pathetic. Or hilarious in a pathetic sort of way. Or something.
Last week in Boston, a water main broke, rendering tap water undrinkable (unless it was boiled). This inspired the journalism majors at Boston station WHDH to produce some highly emotional footage about two tragic side effects—side effects which, as far as it was possible to tell based on everything they teach in journalism school, were entirely unrelated.
First, we had the report on price gouging, featuring a woman weeping—-weeping!—-because her son had been charged $1 a bottle instead of the recent sale price of $3.99 for a case of 24. Then, we had the entirely separate report on frustrated consumers who had visited five stores and/or waited in long lines to buy bottled water. Apparently nobody at WHDH thought to ask how much longer those lines might have been if prices hadn’t risen.
Nor, apparently, have the folks at WHDH ever learned that the whole point of prices is that they adjust quickly to changes in market conditions, and that that’s a good thing. Even the convenience store owner who is a pure altruist and refuses to profit from a crisis would be well advised to raise the price of water and donate the proceeds to charity, rather than allowing all of the available water to be snatched up by whoever happens to arrive first or elbow everyone else out of the way.
In case you think I’m leaving something out, here’s the video footage from the two separate reports—one on prices and one on quantities. (Gee, if only there were some way to relate price to quantity! Maybe somebody could invent a graph with two axes….).
With a hat tip to my former student Noah Bennett:
This is some crazy Deja Vu, I just had a homework problem from your textbook that was exactly like this 2 weeks ago!
Anyways, I love the free market as much as the next guy, but is there any sort of “Don’t be a Schmuck” clause for emergencies? I certainly understand why the high prices exist and all of the economic implications, but everyone needs water, even poor people. What can they do in this situation?
I’m also wondering how long this gouging would last. Because it was just a water main, I’m assuming that bottled water could still be delivered easily so retailers wouldn’t really have any additional cost and people could still shop around for water. Wouldn’t prices drop fairly quickly?
Super-fly,
The fact people agreed to pay higher prices for bottled water when they COULD HAVE just boiled tap water tells you something about a) people’s interest in watching water boil, b) people’s alternative uses for the time it takes them to boil water, c) people’s recognition that they may not know enough to successfully boil the water sufficiently free of contaminants, or some combination thereof.
As to “Don’t be a schmuck” clauses for emergencies, I guess you have to ask what you’d call a guy with a big sign in his front store window saying, “Low, low prices for bottled water during the emergency” and, after battling your way into the store, you’re informed by the owner, “Yes, that WAS my price. I sold out hours ago. Many people bought case after case. I think they’re reselling it outside.” Some might call that guy a schmuck.
As far as how long it would last, I think it would last as long as, but no longer than, people were willing to voluntarily continue to pay the higher prices. Which, when you think about it, is exactly what you’d want.
“I certainly understand why the high prices exist and all of the economic implications, but everyone needs water, even poor people. What can they do in this situation?”
Give poor people money which they can buy water with.
No-one is being deprived of water. They are being deprived of convenience.
Water is seen as so basic and essential that I think there is a confusion between keeping people alive and giving people water. If there was increase in the price of Coke it would probably not cause such a lot of comment, although there would still be cries of profiteering.
If there were to be a genuine crisis where people could die for lack of water, then rationing may be more appropriate than pure price mechanism. The altruistic convenience store owner could try to implement rationing by trying to ensure that only 1 bottle was bought by each person (at the original price).
In this situation, there was a short term shortage, so prices did not rise enough to sufficiently reduce demand. Why did they not rise enough? Because shop keepers would become unpopular and lose long term sales is my guess.
Where there is a “genuine” shortage, people do not mind too much paying extra. If the orange crop fails, then the farmers must charge more, the wholesalers must pay more, the retailers must pay more, the consumer must pay more. No-one makes “unusual” profits. In this case, the retailer had already paid for his water. His price increase goes straight into his pocket as “unusual” profits. This is perceived as unfair, and people do not like unfairness. (Or, as has been pointed out to me before, they don’t like unfairness when they are the ones paying more.) Linking this with the perception that people have no choice but to buy bottled water (apparently forgetting the boiling option) leads to a somewhat misplaced sense of outrage.
As to the media, I have long since given up any expectation that any slightly complex idea will be treated in a sensible manner.
http://www.econtalk.org/archives/2007/01/munger_on_price_1.html
This was a good discussion on price gouging on Econtalk. Some guys bought a bunch of ice and rented a refrigerated truck. They drove to a disaster area after a hurricane and sold it for $12 a bag. In my book, that makes them heroes, greater heroes than the people who DIDN’T ship in any ice. They were arrested for supplying a much needed good, because there is a “price gouging” law in that state. Mike Munger makes the observation that it could have been someone who bought the ice who called the cops on them.
ESM nailed this issue. He addresses the “what to do about poor people” issue as well as the good that would come from higher prices.
Laws that prevent price gouging don’t help the poor. They help the first people who get to the store.
JLA–“Laws that prevent price gouging don’t help the poor. They help the first people who get to the store.”
So a $12 bag of ice represents the rational actors of the market but when those same actors pass a law preventing the practice it doesn’t?
The people passing those laws (or electing the people who pass those laws) understand the value of those laws
Benkyou –
I have no idea what you’re objecting to, but I doubt very much that most voters understand that price ceilings cause shortages.
People face different incentives as consumers than they do as voters. As a consumer, a person bears all of the costs and benefits of their decision. As a voter, this is no longer the case. We should expect people to act more rationally as consumers than as voters.
Landsburg had an earlier post on why people don’t have the incentive to act rationally as voters. See Bryan Caplan’s ‘The Myth of the Rational Voter’ for a more detailed argument.
OK, how about this. Over at Super-Fly’s Water Emporium, we sell two (identical) types of water. One costs $1 per bottle, the other costs $5/bottle. This way, poor people can hang out and buy the cheap water, but the rich people (whose time is, in theory, worth more) might go to the shorter line and buy the expensive water.
This is kinda like how they do things at amusement parks nowadays. For the day, you can pay $60 or so to get you to the front of the line. Any thoughts? I think it’s a pretty good system.
“Why did they not rise enough? Because shop keepers would become unpopular and lose long term sales is my guess.”
This is interesting, in that it’s clearly not a government failure, but perhaps a market failure caused by a lack of understanding of economics. If people boycott a firm for doing something socially beneficial in the mistaken view that it is socially harmful, then rational firms will respond by doing the socially harmful practice.
“No-one makes “unusual” profits. In this case, the retailer had already paid for his water. His price increase goes straight into his pocket as “unusual” profits”
What you’re referring to (“windfall profits”) must be internalised in the original price in any reasonably efficient market. Suppose I grow crops that normally retail for $1 per unit, but 1% of the time they can be retailed for $6 per unit. Therefore their expected retail price is actually $1.05 per unit, and thus their wholesale price must be the same as other goods that always retail for $1.05, minus a risk premium. I as the grower will not earn above-normal profits for this, because so long as growing is a competitive industry, others will enter the market until my profits are normal.
It is true that the sellers earn above their expectation whenever a disaster does hit. They pay for this by earning slightly below their expectation whenever a disaster does not hit though. Still, some people might find this luck objectionable. However, if price increases would really hurt you hard, it’s not terribly difficult to hedge against them. If you’re worried about a worldwide shock, futures in the commodity will suffice. A localised shock is a bit harder but you could presumably come up with some form of contract.
Now, almost no-one does this even when there are no price controls. Transaction costs make it hardly worthwhile, sure. But surely they’re not so high to stop you from hedging against really devastating risks? After all, other forms of insurance have transaction costs and people still use them. My suspicion is that hardly anyone is ever devastated by temporary price shocks. Paying twice the price for certain necessities may be annoying but it’s hardly going to bankrupt you if it’s only for a week or so. Talk is cheap though, so people feel free to whine about how greedy it is.
@Super-Fly
If your goal is to make poor people better off after a disaster, the best way to do that is to give poor people the money to buy goods instead of giving subsidizing water. Why does water rule supreme over all other things people might want?
Waiting in line is also an unproductive use of peoples’ time. A person can be working instead of standing around.
Please keep in mind this is only drinking water that is being raised. Looking at this month’s water bill, I used about 30 gallons/day at home. If I had to pay $30 for each gallon, I’d be broke. On the other hand, if I had to pay $1/bottle and could only drink bottled water, I’d probably only pay about $2/day – something anyone who works can afford. If they don’t work – more time to boil water!
Folks who distribute food, batteries, ice (as in the link above), or water in disasters are doing more than I have done. It is crazy that they could be criminals for providing when I am innocent for choosing not to offer anything to people in need. On the other hand, state legislatures that write such laws should be charged in court and hung as human rights violators.
As much as I love a good song title cum headline; and as much as I love making fun of stupid people, I have to say there seems to be a bit of a disconnect between these journalism majors being ignorant of basic common-sense economics/blindly liberal and a problem with being a journalism major generally. Obviously as a journalist, a person that’s charged with informing that public, there’s a higher duty to *not* be ignorant and to be objective — but still, wouldn’t a better solution to this problem be not letting less “babies grow up to be journalism majors,” but trying to turn out better informed, apolitical journalism majors?
Henry: Windfall profits, thanks. In this instance, the lucky retailers make windfall profits, even if it is paid for by all retailers over time.
Why do people find this luck objectionable? In a “proper” disaster, there is a feeling that everyone should help. We all chip in to help others. If a building collapses and someone is trapped, we don’t stand around negotiating how much we will get paid to dig them out, we just get on with it. I suspect that even the most ardent free-marketeer would agree with this. Someone who denies emergency life-saving aid to another in order to make few bucks is surely in the wrong? So we have this ideal of how we should behave in an emergency.
We also have an idea that it is good for people to be paid for their labors and acumen. So we have a conflict – we encourage altruism in life threatening emergencies, and profit maximising in other situations. However, we do not try to enforce altruism – there is no requirement to come to someone’s aid. That would infringe freedoms too much. (Although I think there is in France). If we can’t make people behave well, perhaps we can at least discourage “bad” behaviour by preventing people profiting from it. We stop people charging $1 million to dig people out of buildings so as not to encourage this “bad” behaviour.
Laws are blunt instruments, and (if we are to have such a law) someone has to draw a line between the good and bad profit. We might wish to prevent profiting from life threatening situations, perhaps even situations where there is extreme pain or discomfort. Perhaps even where the discomfort is not extreme. To make life simple, we seem to have a law that bans windfall profits even where there is quite mild discomfort as long as the cause is an event big enough that it would affect prices. It may have some justification for material already in the disaster area, as this does not affect supply. It also affects prices of materials brought into the area after the disaster, which must reduce supply. I suppose it prevents people going into areas and charging for their labor.
So, it is a law which is inspired by a sense of fairness and to encourage “good” behaviour, but has unintended consequences, and could make things worse.