September 28, 2021

I have a full tank of petrol. I’m reluctant to advertise the fact, in case gangs of Mad Max-style marauders turn up at my front door with machetes and a siphon, but we got lucky: we happened to fill up midweek. Still, though, we got caught up in huge traffic jams over the weekend, because people were queuing down the road from every petrol station we passed.

There’s been a lot of talk of “panic buying”, but that’s not what it is. It’s straightforward rational behaviour. If you know that you need petrol, and you know that petrol stations are likely to run out of petrol, then it is entirely rational to get to the petrol station as quickly as possible and buy as much as you can fit in your tank.

The trouble is that it’s also rational for everyone else to do the same thing. So you end up with everyone blaming everyone else for being selfish, while insisting that they have excellent reasons for needing the petrol right now. You’re not stuck in traffic, you are traffic. It’s the exact situation we had with toilet rolls and Calpol in March 2020.

Over the long run, the market normally solves coordination problems like this, reasonably effectively. If lots of people want some resource, then the people selling that resource realise they can make more money if they raise the price. At the higher price, fewer people are willing to buy it, but the seller makes more money per unit sold. And, in theory, they can keep raising the price until the lost sales start to outweigh the gain per unit.

This is completely normal. Try going to Center Parcs in term-time, and you’ll find that you only need to sell one kidney for four nights. Try going in half term, and you’ll be harvesting organs from your entire street. More people want to go on the rubber-ring flumes during school holidays, so the company can charge more money for it. This is how the economy works, and normally we’re broadly OK with it apart from the occasional communist revolution.

But when companies try to raise their prices during an emergency, we call it “price gouging” and we’re really against it.

In some places, in fact, including many states in the US, it’s literally illegal. In Mississippi, for instance, there is a provision in the law that when an emergency is declared, you’re not allowed to put prices up: “the value received for all goods and services sold within the designated emergency impact area shall not exceed the prices ordinarily charged”.

This leads to some strange situations. In 2005, in the aftermath of Hurricane Katrina, a Kentucky man named Jim Shepperson bought 19 generators, and drove them 600 miles to a part of Mississippi that had suffered power outages. He rightly thought that people would be eager to buy them at twice the price he had paid for them. Instead, though, the police confiscated his generators, and threw him in jail for four days. So no one got the generators and he didn’t get the money. It’s a nice example of the Copenhagen Interpretation of Ethics: as soon as you do anything to help solve a problem, you can be blamed for not doing more.

In the UK, we don’t have price-gouging laws. But there is a strong resistance to the idea. Last year, when masks, hand sanitiser, toilet paper, paracetamol and so on were all in short supply, various retail groups put out a statement condemning price gouging: “Those who inflate prices to profit off the backs of their customers are adding to their distress at a time of particular vulnerability.”

The funny thing, though, is that most economists would tell you that price gouging is — on balance — a good thing. When asked whether “surge pricing”, increasing prices during periods of increased demand — as Uber does — increases the supply of those goods, most economists said yes. When asked whether Connecticut should ban price gouging in natural disasters, most economists said no.

That might sound strange. Jacking up prices in an emergency sounds immoral — you’re taking advantage of people’s desperation. Poor people won’t be able to afford the goods. Most people have a strong intuition that you shouldn’t be allowed to push prices up.

But look at the effects. First, if costs are artificially low — if a product is available at a cost much lower than customers are willing to pay — then it becomes rational for customers to stockpile those products. If I know that people are going to buy all the toilet paper at the store, and the toilet paper is still 50p a roll, then I can easily buy 100 rolls for £50 and stick them in the back of my people-carrier. If, however, the cost of a toilet roll had jumped to £5 a roll, I’d be much warier, and so there would probably still be toilet paper for the next person to buy. Instead, I’ve bought it all. If it was appropriately priced, it wouldn’t be so likely to run out.

Second, appropriate pricing tends to put goods where they’re most needed. People who really need that product — in the case of petrol, people who definitely need to get to work, or to visit a distant relative, or whatever — will be willing to pay more than people who are simply worried that they might have to drive next week some time. When pricing is artificially fixed, goods will tend to end up with whoever happens to get there first, rather than the people for whom they’ll do the most good.

Third, retailers respond to incentives too. If they know they can make a decent profit on some good, then they will bring it where it’s needed. John Shepperson, the guy with the generators, wouldn’t have bothered bringing those generators if he could only get what he paid for them. (Maybe he should have driven 1,200 miles to sell them at cost, but since no one else brought any generators at all, it still seems better that he brought them.) They might also stock up on goods when they’re cheap, against the possibility that there will be some time in the future when they can sell them at a higher price.

And some emergencies are foreseeable, to an extent. As Amihai Glazer, an economist at the University of California, Irvine, says, if a retailer knows a week in advance that there’s a snowstorm coming, they might order loads of snow shovels, because they know they’ll be able to sell them at a higher price. But if they expect price controls, they will have less reason to do so. So fewer people end up with snow shovels than would otherwise get them, and you get queues, rationing and shortages.

The obvious objection is that, if you raise prices, poor people are less able to afford the new higher prices than rich people. That is undoubtedly true. I said earlier that if prices go up, goods will tend to go to the people who need them most — and that’s true, all else being equal. But all else is not equal. Some people are simply much more able to pay.

But it’s not clear that poor people are any better off under the current system. In the case of toilet roll, for instance, I can afford to drive to the shop in my large car and pay £50 upfront for toilet roll, so I have loads. Someone who is poorer, who has to walk or take the bus, and only has £5 or so that they can spare, will not be able to stockpile. They might have much less spare time. In the case of queuing for goods, a rich person could pay someone to queue for them, as purportedly happened in the 1973 oil embargo (there were even reports of people offering sexual favours in return for petrol), or pay for childcare while they queue themselves.

What might work better would be allowing price gouging, but subsidising goods for poorer people — people who are on housing benefit or whose children qualify for free school meals, for instance, could be given vouchers. In general, it’s a reason to aim for a more equitable society, make it so there are fewer people who can’t afford a £5 toilet roll, rather than to try to patch the problem in the moment of crisis.

There are lots of other reasons why prices might not be easy to change at short notice — why they’re “sticky” — and laws against price-gouging certainly aren’t the whole story. In the UK, as I mentioned, we don’t have price-gouging laws. But the strong social norms against price gouging have much the same effect. I spoke to someone who works in supply chain logistics for major British retail firms, and they said that it’s a brand reputation issue.

That is: you spend years building up a reputation for value and fairness, and for encouraging people to shop with you rather than elsewhere, and that reputation is worth far more to you than the quick buck you could make by jacking prices up for short-term profit.

This sounds good — firms don’t want to make a short-term profit at the cost of customer reputation! — but it has the same effect as legislation. Prices that should go up don’t, so stores don’t stock extra, people stockpile, and goods don’t end up where they’re most needed.

It’s much harder to change public attitudes than it is to change legislation. But it’s not impossible. As Rob Wiblin, an economist and the director of research at the charity 80,000 Hours, told me, flight prices used to be fixed. Many countries deregulated their air industries in the 1970s and 1980, and now, we’re entirely used to rapidly fluctuating prices — even between two clicks on the same website. It doesn’t bother us all that much. Public attitudes are somewhat malleable.

But maybe they aren’t so malleable that we could come to accept someone charging £5 for a face mask during a pandemic — it feels immoral, at a time when we feel like we should all be coming together. Most people would probably find it disgusting, as they did when hotels increased their prices after the 7/7 bombings when thousands of people were stuck in London. But what we find disgusting is not always a good guide to what is moral, or for that matter what is effective. It might be worth changing our attitude.

Because if we can change our attitude, it would probably do us all good, especially if we combined it with sensible ways of subsidising the purchasing power of poorer people. Price-gouging has a bad name — literally — but it’s not always a bad thing. Now, if you’ll excuse me, I need to start fighting off gangs of road warriors on the streets of Haringey, because the local petrol stations haven’t price-gouged enough.