Some for most is better than none for many
Opening night
During Cher’s first farewell tour I was the chef of a restaurant due to open that week. Cher was coming to Tallahassee the night we were scheduled to open and the venue was within easy walking distance.
We got clobbered.
In kitchen speak, which tends toward very salty language, it was asses-and-elbows. That means it was so busy everything is a blur.
The recent Filene’s Basement-esque displays of toilet paper buying reminds me of that night. Almost pandemonium.
The analogy falls apart after that but the point is the crazy frenzy is like an accident on the freeway: you can’t not look.
Localized emergencies such as the storm in Houston or New Orleans or North Carolina or Florida remind us that emergencies happen and there needs to be a system in place to make sure everyone gets at least something of what they need.
But there’s another piece to that puzzle. Getting more of those goods to those areas of need so more people can get at least some of what they need. That toilet paper scrum ended up with a few getting dozens of packages and the rest of us seeing empty shelves that needed cleaning.
The needs of the many
Want and need are not the same thing. A reasonable person would likely be correct that no one needs 15 48 packs of toilet paper even if she wants them.
We have an immediate problem. In that emergency, and the Covid-19 pandemic is an unprecedented emergency, what people want exceeds, maybe, what they need. Here’s the first place anti price gouging laws hurt.
Since the demand has clearly increased, the price should rise to meet that. When the price is prevented from meeting demand the shelves are empty. Anti price gouging laws prevent the market from functioning as it ought. Very shortly the complaints that someone ought to do something will be heard. Read more about the benefits and moral reasons of rising prices here, here, here, here, and here.
Government is never a good answer to any problem
Well, someone was prevented from doing the first right thing which was to raise the price. An increase in the price encourages the conservation of cash resources that the customer has. It also, then, leaves more on the shelf for the next customer.
One part of buying that seems often overlooked or under-explained in papers about prices is the funds. For this piece, I’m talking cash or debit or checks, not credit card purchases. Our customer has a finite amount to spend. If it is spent on TP it cannot also be spent on food.
The second problem
I mentioned that the anti price gouging law on the shelf was the first problem. The problem is seen on the shelf being empty.
The price remained stable for toilet paper and it’s all gone. A great bargain but nothing to buy so who is helped?
There is another side, really two, to the goods getting to the store and that’s production and distribution.
Price is a message to the producer that something in the TP market is not the same as it was.
In hurricane situations, anti price gouging laws almost always go into effect. And often to very bad consequences.
In the cases of hurricanes, the price system tells nearby one-time entrepreneurs that there is a need. In Florida, that need is usually ice, water, and generators with other items near the top of the list.
When the power goes out people want a generator. The man in this story was arrested for selling generators for twice what he paid-he did drive 600 miles to sell them-and the people were willing to pay his price before he was arrested and no generators were sold.
These guys were arrested for selling ice above the allowed price. But, what is the allowed price and how does a government know what that is every day, all day?
The thick and the thin
A gut reaction to prices increasing as a bad thing is probably normal. It’s also the wrong reaction. Perhaps in a perfect world, enough people would send water, ice, and generators to areas that desperately need them. But people don’t do that.
Prices, then, are the only way to convey the urgency of the need. Swimming trunks and batteries are not valued the same in a hurricane. Ice and ice cream are also not valued the same. Without a price, manufacturers have no reliable way to determine what is needed. And, without earning a profit, people willing to buy 19 generators and drive 600 miles will not do that-generally-out of benevolence. Too few, anyway, will do that to be of help.
Power outages due to hurricanes are relatively short in most cases. Hurricane Charley really did damage to Florida in 2004. The other storms were of no help. I lived in Tallahassee then and my house was without power for 3 days. Parts of Orlando went weeks.
That’s rare. When access to needed goods is disrupted, the price rise alerts production and entrepreneurs that a need exists. At a profit. If that profit was not part of the equation, few people would venture into felled trees and stray powerlines. The profit is a reason to do that.
Something else happens, though. As more needed goods arrive, the price falls. Even with the 2-week delay in Orlando, more goods were brought in and prices fell.
Hurricane emergencies are short-lived.
Pandemics are another story that is being written. So much remains unknown including the availability of trucking and staff for production and access to raw materials for production. If manufacturers don’t know which is more urgent, toilet paper or cardboard boxes how can they make the right choice about what to make or where to allocate the scarce resources of labor? What happens and how the supply chains hold up is unknown but very interesting to see.
Economics is woefully dispassionate. Economists are not dispassionate. Incentives matter. Kindness is an incentive. It is an incentive far too few people exercise at a level required in emergencies for specific goods. Americans are overwhelmingly compassionate with dollars as donations, which helps. But they are not turned into toilet paper or generators or ice if the stores are out because anti price gouging laws didn’t allow prices to do their job.
Profit is also an incentive. The kid selling lemonade learning a business skill seeks a profit. If you own a business you seek a profit. If you work for someone, that person seeks a profit. Profit is, to some, a 4 letter word and it seems only due to a failure to understand basic economics. Without a profit, businesses will fail, everyone is unemployed, and no one is better off for that.
Prices rising is a good thing since someone has the incentive to get those needed goods to where they are most urgently needed. They who are compassionate may donate that profit to a charity in that area.
Almost, but not quite?
Perhaps I’ve not swayed you to at least consider that prices doing as they ought is the right way for everyone to at least get something. If you remain certain that prices ought to remain fixed even if that almost guarantees shortages and you also feel certain someone ought to do something, have you send money or toilet paper to anyone? Did you donate a generator to a hurricane victim?
If everyone feels something ought to be done and someone else ought to do it, no one does anything. If the prices can’t do what they are designed to do, who has been helped?
********
Did you like blog post? Please support the blog with a contribution below.
$1.00
$5.00
