Price Gouging and the Knowledge Problem

 If we should make price gouging illegal, then we have to ask, how do we solve the 'knowledge' problem? i.e.

Is there a 'more appropriate' price that should be charged? How do we find a price that ensures that the intensity of your desire/need for a generator is consistent with my willingness to provide one? Should we rely on market forces and prices at all or simply have some authority distribute generators based on some set of rules? Rules based on what criteria? How many generators are required and how do we make sure that they get to the people that have the greatest need/desire for them? i.e. how do we know if generators are allocated to the most highly valued use? What lessons can we learn from Hurricane Katrina about the government's ability to mobilize resources during a natural disaster? See also:

The use of knowledge in disaster relief: http://www.independent.org/publications/tir/article.asp?a=628

The Government's Response to Hurricane Katrina- A Public Choice Analysis: http://www.peterleeson.com/hurricane_katrina.pdf
The Problem with Price Gouging Laws-Regulation Spring 2011: http://www.cato.org/pubs/regulation/regv34n1/regv34n1-1.pdf

The Knowledge Problem - blog posts related to price gouging: http://knowledgeproblem.com/tag/price-gouging/ 

Environmental Economics blog post related to price gouging: http://www.env-econ.net/2009/06/mike-giberson-on-antiprice-gouging-laws.html 

Price Gouging Laws Cause Marathon to Reduce Supplies

In the event of a natural disaster, when resources may be in desperate need, misguided government policies that prevent prices from reflecting our desperate needs and scarcity created by the disaster can cause problems. In this case, Marathon decided not to send much needed supplies to independent gas stations in response to their respective state's anti-price gouging laws:

Manchin Vs. Marathon
W.Va. governor criticizes oil company's decision to withhold indy gasoline deliveries

Issue Date: CSP Daily News, June 1, 2009

By Greg Lindenberg


"When these declarations are made, they automatically trigger the state's pricing laws," Marathon spokesperson Angelia Graves told CSP Daily News. We take compliance with the laws of West Virginia seriously. Price controls, like this law, negatively impact supply by discouraging additional supply from being brought into the area. During this time, we have continued to fulfill all of our contractual obligations in the state. In fact, we continued to supply over 90% of the normal base. I believe the governor is referring to independent wholesale customers in his statement, customers who choose to operate without supply contracts. As a result, when supply is tight or other situations arise such as states of emergency, independent customers who do not have a contract with us may have to look others places for product." (link)

See also:
The Problem with
Price Gouging Laws
Is optimal pricing during an emergency unethical?
Spring 2011 | Regulation |


"If the virtue argument for price gouging laws fails, we are left with welfare and freedom considerations. Here the case against price gouging laws is substantial. Price controls interfere with the ability of merchants and consumers to settle freely on the prices at which they will trade. Price controls also reduce economic welfare: by limiting price increases in areas harmed by emergencies, the laws discourage conservation of goods and services precisely when they are needed most and discourage extraordinary efforts to bring goods in high demand into the affected area. " link