Price Gouging or Price Information?

It's an imaginary system . There always are transaction costs . When it is costly to transact , institutions matter and it is costly to transact . Price gouging is defined as charging a high price for something consumers really need in an emergency situation .

Now some people would just think of the prices of beer at an NFL game , say at Oakland's Alameda Coliseum back when they used to play there . I realize they're in Las Vegas now , but those are the numbers that I have . Apparently they were trying to make up for the fact that they were losing money by charging $10.75 for a 12-ounce beer .

Popcorn at movies is often $12 , $15 for a large . Now that seems like gouging because it's a high price and I don't like it . But those are just local monopoly prices for non-essential items , although for some of you probably beer at a football game . Well , real price gouging is often illegal .

So anti-price gouging laws have three parts the trigger , the domain and the limit . So here's the part of the statute from my home state , north Carolina .

Upon a triggering event , it is prohibited for any person to sell or rent or offer to sell or rent any goods or services which are consumed or used as a direct result of an emergency , or which are consumed or used to preserve , protect or sustain life , health , safety or economic well-being of persons or their property , with the knowledge and intent to charge a

price that is unreasonably excessive under the circumstances . So it's prohibited for any person to sell or rent goods or services used as a result of an emergency with intent to charge a price that is unreasonably excessive under the circumstances .

In this case , the trigger is the declaration of a state of emergency by the governor or some abnormal market disruption , according to the statute . So this could be caused by a natural disaster , weather acts of nature . Any of those are a trigger the response of a state of emergency by the governor or an abnormal market disruption that causes an extreme shortage .

The domain , as you can hear from the text of the law , is stuff you really need Now I'm paraphrasing , but anything that you really need . So if you charge a high price for ice , the kind not the kind of ice that my wife likes to wear around her neck , but the kind of ice that you need when your freezer is thawing because the power is out .

Well , that leaves the limit . If the law is triggered , and for commodities or services in the domain , how much can sellers raise price in the face of scarcity ? And I already read it , but I want to make sure you caught it Sellers can't charge a price that is unreasonably excessive under the circumstances .

So the price can be unreasonable , it can even be excessive , but it cannot be unreasonably excessive . Now I'm joking , but that's literally what the law says . That's not clear at all . That means that oftentimes people are not sure if they're violating the law or not .

Now , apparently , the concrete interpretation of that phrase is 5% , perhaps 10% , depending on the circumstances . But if it's difficult for you to tell whether you're breaking the law or not , you're probably going to try to keep price even lower , which means that the law has a chilling effect on commerce . If it were clear , it would help .

It would still be dumb , but it would help . There are 34 states with anti-price gouging laws . A few others have statutes that can be used that way . Now there are three problems with anti-price gouging laws . First is misallocation . You walk into a store . The price is low . That says , take all you want , there's plenty .

You walk into a store and the price is high . It says there's not enough , leave some for the person behind you . So if we have laws that keep prices artificially low , it makes people more selfish than they need to be . I would like for people to have a reason to take account of the needs of others , and that's what high prices do .

Second , high prices are likely to encourage stockpiling beforehand . So if you have an anti-price gouging law that will discourage stockpiling beforehand Say , there's a hurricane coming , you know people are really going to want milk or bread or other staples Stores could fill up their warehouses with needed supplies . That's expensive .

Sometimes the hurricane passes without doing any damage . Changes course . The sellers could end up with a lot of wasted stock . So they're taking a risk With anti-price gouging laws .

There's no advantage to stockpiling because you can sell things at the regular price anywhere , and so stockpiling , which would really benefit people , is discouraged by anti-price gouging laws . Third , it discourages new supplies afterwards . What I mean is , if you have an anti-price gouging law . It keeps the price low even though you don't have enough of that stuff .

So I can sell milk ice whatever people need in my store in Asheville , or I can hurriedly transport it to Raleigh , where it's desperately needed , and sell it for the same price . Who's going to do that ? The only way I'm going to try to take things where they're needed is if the price is higher . It provides both a signal and an incentive .

Anti-price gouging laws block that and they make it much harder to secure the new supplies that people need . The hard thing for most people to understand is that the only way to get plentiful supply at low prices is to allow high prices .

High prices are a signal that more is needed and that people serving that desperate demand can be paid enough to make it worthwhile . But anti-price gouging laws raise transaction costs by blocking this information signal as effectively as an enemy army might lay siege to a city . I want you to think about two people . We'll call them person A and person B .

Person A learns that there has been a hurricane on the coast of North Carolina and says that's really terrible . I feel awful for those people . Someone should do something . Or person B , who says holy cow , they really need ice . I'm going to go and rent a truck , buy all the ice I can find and take it to the beleaguered city on the coast .

When they get there , of course they charge a high price , because that's the reason that they were going . But people have ice that they're able to buy which otherwise they wouldn't have been able to purchase at all . Now , which one of those two people should we put in jail ? Remember A does nothing , although they do feel bad .

B sees a profit opportunity and does that which a omniscient , benevolent dictator would whisper in your ear take ICE to the coast where they need it . Well , we put person B in jail because we have anti-price gouging laws . The grave difficulty that anti-price gouging laws cause is a confusion between three states of the world .

First , everybody can buy everything they need at the price of that was apparently given to us by God a week ago . Second , we can keep the price where it was a week ago , but given that there is a shortage , there won't be enough and we'll have empty shelves . Third , we can allow prices to carry out two functions . First , help with allocation .

If the price goes up , people who don't need to fill up their grocery baskets will only take what they actually need and leave some for the people behind them , and people far away will be given both a signal and an incentive to transport the needed material to the place that needs it . So the problem is the information signal is being suppressed in two ways .

Anti-price gouging laws say we won't let prices signal the information that people need this . Leave some for the person behind you , and we won't let prices signal people need this . If you have extra in your city 200 miles away , get it on a truck and get it there as fast as you can , because if you do that , the shelves will not be empty .

So really , the only choice is between the second and third alternatives . Do we want low prices and empty shelves , or high prices and the promise that soon there will be more of the stuff that we really need ? Whoa , that sound means it's time for the twedge . This , in my opinion , is the best all-time price gouging joke and it's an economic insight .

This is a story that I've heard told about North Carolina , but it may have originated somewhere else . If someone else has heard it , I'd be interested to know . There's been a hurricane and people are desperately searching for things that they need .

The owner of a convenience store has set aside some cases of bottled water in advance , knowing that people would need it . He knew the storm was coming and so he filled up his storerooms with as many cases of bottled water as he could get . Now he puts out the cases of bottled water and they're $40 .

So 24 plastic bottles of drinking water for $40 , which is quite expensive . Customer comes in immediately , becomes angry and complains you know , the price down the street is only $12 per case . Why are you price gouging ? The owner is puzzled Well , that's fine , why don't you go buy your water down there ? It's up to you .

Customer says well , they're out , the shelves are empty , but their price is $12 . You shouldn't be charging $40 . The owner says oh , oh , I see , I tell you what . As soon as I run out , I promise I'll drop my price to $10 . Even lower Deal this week's letter .

Hi , professor Munger , I recently listened to your podcast where you discussed the idea that every house is an affordable house , and I wanted to share some thoughts . First , square foot per capita . One important aspect is the amount of square footage per capita in the US over time , which also holds true in Canada .

You look at the data , you'll notice that square footage per capita has remained relatively stable , if not increased , over time . This suggests we don't necessarily have a shortage of housing in terms of square footage per person . What we have is a distribution problem . This could be a result of transactions costs related to distribution . A distribution problem .

This could be a result of transactions costs related to distribution . Additionally , this trend implies an increase in empty rooms as household sizes shrink , meaning the number of people , whereas the houses , over time , have grown . The issue lies in the mismatch between supply and demand distribution , rather than a true housing shortage

. Second , shared equity loans or mortgages . I'd like to highlight the impact of mortgage costs and interest rates . One potential solution to the housing affordability crisis , which has been applied by Freddie Mac and Fannie Mae , is shared equity loans .

With these loans , a bank or individual lends money to a home buyer , home owner without requiring monthly payments on the loan , but they retain an option for a percentage of the proceeds from the home's eventual sale . For instance , if a bank loans 80% of the property's value and the property is sold 10 years later , the lender receives 80% of the sale proceeds .

This arrangement allows the homebuyer to benefit from property appreciation without bearing the full burden of ongoing costs , while the lender benefits from the reduced transaction cost and shared appreciation . Third , I have a proposal for a citizen dividend through a land tax .

I'd like to discuss the idea of shifting the tax burden from income something society generally wants to encourage where taxes discourage it to land , a resource that's fixed and cannot be easily manipulated . This is a Georgist approach where a land tax , say 1% per year , is applied to all land . Such a tax would discourage hoarding and underdevelopment of land .

The revenue from this land tax could then be returned to citizens where it's collected . For example , if a municipality imposes the land tax , the proceeds could be distributed as credits to all residents , which could be spent locally , potentially with geofencing , like in the Wurgel experiment in Austria or similar experiments in South Korea .

This could result in something like a $400 credit card that has a balance reset every month . Jurisdiction could even sweeten the deal by allowing citizens to pay off the credit card early and have an increased limit in the $800 in the following month , with maximum forgiveness capping out at $400 a month .

I'd be interested to hear your thoughts on these ideas to properly frame the housing shortage in quotation marks and ideas to potentially reduce monthly transaction cost of ownership . Cheers SJ . Well , thanks , sj . I don't have much to say about the Georges proposal . Thomas Paine proposed something very like this a land rent in the late 18th century .

There are a lot of Georges proposals like this and they're certainly interesting . It is a way of generating something like a universal basic income for people who live in towns that have this system . It's a complicated issue . I'm not going to say much more about it .

What I thought was interesting is your proposal that we need some way of commodifying excess capacity . That's something that I've been interested in for a long time .

So a homeowner might have a considerable amount of extra space , but it is difficult to find a way for other people to use it , and that's one of the things , of course , that Airbnb is so good at is the commodification of excess capacity .

So if I were able to rent out portions of my house and do it in a way that were convenient and safe , that solved the problems of triangulation , transfer and trust , we probably could solve some part of the housing shortage , and I'm using the word , as you did , with quotation marks .

The problem , of course , is that the housing shortage is , in part , caused precisely by the fact that many cities and other jurisdictions will not allow rental of part of a house . They won't allow rental of a room . So the first thing that we need to do is get rid of the restrictions that make it illegal to commodify excess capacity . It used to be .

The size of apartments was very small , they didn't have a bathroom , they didn't have a kitchen , it was basically a room , and if you're poor and you can get something like that for $30 a night , that's not bad . That's better than sleeping out on the street .

But those are explicitly illegal , and so the difficult thing is , the commodification of excess capacity on all sorts of margins is being blocked by laws , and so making it possible for people to make more efficient use of their existing space would be a big step toward reducing the housing shortage .

The book of the week this week is by Ruchir Sharma what Went Wrong with Capitalism , published by Simon Schuster in 2024 . I want to hate this book . I still actually want to hate it , but I can't because I think it's right .

The argument goes like this Analysts , pundits , government officials , even more many people in the industry , have embraced a false narrative which claims that deregulation and shrinking government have caused instability in capitalism . Now it is true that capitalism has become unstable , but regulations have expanded , not shrunk . The size of government has consistently grown .

Size of government spending is just monotonically increasing . That narrative is simply false . However , that's the story that people tell themselves . Second , it really is true that giant corporations dominate the economy . This process is accelerating . The total stock valuations are at unprecedented heights , ceo pay and compensation for Wall Street operatives are shockingly high .

But remember , the standard narrative says government's been shrinking . So the solution is we need to make government big again . But that narrative is false .

The real explanation is an asset inflation or financial bubble caused by excessive government spending , expanding debt , profligate expansion of the money supply and excessive regulation that makes it difficult for small or new firms to enter , thereby insuring and protecting the profits of the large incumbents .

Third part of Sharma's argument is the conflict between the standard narrative and the truth is going to cause a cataclysmic showdown between pretense and reality . If , as our leaders say and our young people are convinced , the problem is an unwise shrinking of government , well the answer must be larger government , and fast .

That's wrong , but still the cataclysm is going to be caused by the collision between the grossly inflated values of financial assets and derivatives whose value depend on those assets , and the mistaken prescription that the solution is even more spending and more regulation . That correction , when it comes , is going to be devastating .

So , as I said , I wanted to hate this book . I just couldn't . The next episode will be released on Tuesday , august 27th . We'll have a new topic , some letters and , of course , a hilarious new twedge .

And I should note , next week , on the 27th , is the last week in August , which means that I'll go to the school year schedule , one podcast per month rather than one per week . We'll have an interview with someone interesting and I'll learn a lot from the conversation . All that and more for one more week here on Tidy C .