20 June 2008

The Morality of Prices

In a timely manner, Michael at Knowledge Problem discusses the morality of raising prices in an emergency, which is directly related to "Evil Market Forces," below. This is the comment I left:
I didn't think of the "taking advantage" view, which is now immediately obvious. I think we (economists) can present the argument in this way:
  1. Things are screwed up and we're running out of x.
  2. Since we can't give everyone the same amount of x (the "fair" outcome), we need to ration it.
  3. Price is the fastest way to ration x. Other ways may be possible, but we don't have time to argue.
  4. So we go with price rationing/gouging.
Interesting, to me, that this argument is precisely the one I use wrt allocating scarce water resources -- except I DO give everyone a small, initial allocation before using price to ration the rest.
Addendum: Tyler Cowen advocates "radical privitization" to solve water problems in the developing world. I think the idea fails -- a private monopoly need not be better than a public one.

Addendum 2: I read the piece. Tyler's idea is better than the status quo (incompetent and corrupt public monopolies). It also makes sense that a private monopoly can extend the network farther by being more efficient and being able to price discriminate (ironically that will mean lower prices for the poor, e.g., as we get with pay-as-you-go cell phones). I still think it's a political non-starter, but it could be implemented by requiring a low/zero charge for the first allocation of water.

Addendum 3: We have to assume profit maximizing private corporations, and that can be a big assumption.


  1. The developing world has had multiple episodes of radical privatization. Consider the green revolution. Seed, fertilizer, and pesticides were privatized to the max. Their distribution and availability were controlled in many cases by cleptocracy. A few powerful individuals controlled access to land, which was effectively private. The forces that led to a middle class and the kind of economics that we learn about as undergrads were thwarted by the above powerful concerns, including the corporations that are exemplars of privatization. We could go on with this them into petrochemicals, coal, natural gas.


