Tax Price Gouging?

post by jefftk (jkaufman) · 2025-01-17T14:10:03.395Z · LW · GW · 6 comments

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In the aftermath of a disaster, there is usually a large shift in what people need, what is available, or both. For example, people normally don't use very much ice, but after a hurricane or other disaster that knocks out power, suddenly (a) lots of people want ice and (b) ice production is more difficult. Since people really don't want their food going bad, and they're willing to pay a lot to avoid that, In a world of pure economics, sellers would raise prices.

This can have serious benefits:

• Increased supply: at higher prices it's worth running production facilities at higher output. It's even worth planning, through investments in storage or production capacity, so you can sell a lot at high prices in the aftermath of future disasters.

• Reallocated supply: it's expensive to transport ice, but at higher prices it makes sense to bring it in from much farther away than would normally make sense.

• Reduced demand: at higher prices people who would normally buy ice for less important things (ex: drink chilling) will pass.

• Reallocated demand: if you have a chest freezer full of food, you get more benefit from a given quantity of ice than I would with a mostly empty fridge. All else equal, you are willing to pay more for ice than I am.

On the other hand, raising prices in response to a disaster is widely seen as unfair:

• Allocation by price is never great for people who have less money, but a disaster makes this existing inequality more painful.

• Store owners are on average richer than customers, so profits here are moving wealth from poorer people to richer ones.

• Normally prices are kept in check by people shopping around, either by observing prices in a range of places or by talking with friends. These are both disrupted in disasters, which would likely allow sellers to charge more.

So raising prices in emergencies is generally strongly socially discouraged and often also illegal. Stores quickly sell out, there's no increase in supply, and allocation is relatively arbitrary.

Is there a way to get the benefits of keeping prices responsive, while mitigating some of the unfairness?

Consider the introduction of congestion pricing in NYC. Charging money to keep people from overusing a common resource is a traditional economics solution, reducing traffic jams and allowing streets to move more people in less time. While this even helps people who can no longer (or never could) afford to drive, by speeding up buses, it is still often considered too unfair to implement. The NYC approach, however, of charging drivers but then using the money to fund public transit, resolves enough of the unfairness to be put into practice.

What could something similar look like for disasters?

• Sellers can, as in normal times, choose what prices to offer their goods and services at.

• Price increases beyond documented increases in the cost of doing business are taxed at some high rate. Something in the range of 65%: high enough that most of the profits are going to the public, but where it's still worth sellers putting in serious effort to increase supply.

• This tax money goes to help people affected by the emergency.

While this still has some of the downsides of existing price gouging laws [1] I think it's quite a bit better than the status quo.

The biggest advantage is that if the government disagrees with you about how much of your price increase is due to increased costs, it can be sorted out later. There are famous cases where someone tried to increase supply in a disaster by doing something unusual (ex: renting trucks to drive generators or ice hundreds of miles into hurricane-affected areas) and then were prevented from selling. Much better to have a system where we all agree they're good to go ahead and sell, and tax disagreements can be worked out afterwards. It still doesn't fully remove the risk that the government will disagree with you and make your efforts not worth your while, but at least you're arguing with a judge in a courtroom where you can present evidence, and not a cop in front of a mob.

It also:

• Gets us some of the benefits of flexible prices, at least to the extent that sellers believe they'll be able to convince a judge about their increased costs.

• Helps shift culture in a direction of accepting and expecting prices to change based on conditions.

• Transfers money from rich people (who pay inflated prices) to poor people (who receive disaster relief).

Would people be more ok with responsive prices in emergencies if the money were primarily going to disaster relief?

[1] I've previously written about discouraging investments, but another issue is not handling cases where people might be convinced to sell something they wouldn't normally. For the latter, imagine an empty nester couple living in a 3BR in LA. They prefer to have the house to themselves, but for $5k/month would be willing to rent out their guest room. In normal times no one would pay $5k, so they don't bother putting it on AirBnB. With the emergency, however, there might now be people willing to pay this much. There's no way for the owners to demonstrate increased costs, though, so it would probably be illegal for them to list it for $5k both under current laws and with my proposed change above.

Similarly, say I have a bunch of $150 air purifiers because I'm especially concerned about infectious aerosols, and then with a nearby wildfire stores all sell out. By default I would keep them and enjoy my clean air, but I'd be willing to sell a few for $300 each. That would benefit both me and the buyers, but same issue.

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