Tennessee charges someone with price gouging

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A gas station owner in Tennessee is the subject of a lawsuit for charging $7/gallon last Friday. [*]. See my previous post for why this is stupid.

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The price gouging regulatory regime is simply an incentive regime. Like most incentive regimes developed by economists, it relies on moral, social, and economic incentives to realize an objective.

Your previous post didn't really explain why moral and social incentives were stupid. I'm sure many professional economists would be interested in learning.

Most professional economist (with the notable exception perhaps of Sen, whom I know you like) would shy away from "moral" incentives.

As for social incentives, my guess is that most economists would say that the government shouldn't be in the business of explicitly providing them. The free market is perfectly capable of pumping the imagine of protesting consumers marching in front of a gas station to millions of homes.

As for economic incentives, Eric did in fact already cover this.



Can you name any professional economist who is in favor of anti-price gouging legislation?

Steven Levitt, University of Chicago. In the first chapter of his book, Freakonomics, he outlines why moral and social incentives are consistently used by economists as part of any incentive package, using a trivial example of the failure of fines imposed on parents picking up their kids late from day care.

Levitt is, of course, only a high profile example because he is considered a wonder kid. But there are many others.

I don't have a copy of Freakonomics. Could you maybe post the passage where he talks specifically about price gouging?


You just asked me to cite an economist. Had you read the FTC rule memos, you would have learned that Levitt was a consultant on the development of the incentives. That isn't to say that the chosen incentives are WORKING (he needs data to conclude that) but these incentives were envisioned to be used as a force against excessive volatility.

Kevin disputed the use of social incentives, and Freakonomics provides an ECON 101 level insight into why most economists, and our political system which integrates it, mix social/moral incentives as part of an incentive regime.

I listened to Freakonomics on tape while running, but Levitt's basic opinion can be found here:

When you think about "price gouging" rules as price controls, it's no wonder you think they are crazy. But that isn't the interesting discussion. The interesting discussion is whether, as incentives, they help free markets reach equilibrium faster than without the incentives.

Actually, I disputed the use of social incentives by governments. Social incentives are typically more complicated than purely economic ones. As the government rarely gets purely economic incentives right, my guess is that even fewer economists advocate governments trying to wield social incentives. Hmm, maybe Levitt would recommend a government funded campaign to promote abortion in order to drive down crime rates...

On the other hand, social incentives as part of a Madison Avenue mass market campaign are undeniably effective, as are their use in how local PTAs hit parents up for money. My point here, is we should let the market work out appropriate social incentives against "gouging".

A large portion of US laws involve social and moral incentives. And nearly every economist who works with the government works on such incentives. A simple example is Welfare reform, where the discussion was nearly entirely about social and moral incentives.

In the case of gas price gouging, the government is exercising a reasonable role, as defined by everyone from Friedman to Sen. The goal is to act as a pressure to discourage excessive volatility, assuming that unnecessary uncertainty and volatility in the market can be a drain on efficiency. There is no reason that our citizens must experience unnecessary drains on GDP when we can do something to curb them. And that goal seems about as intrusive on free markets as limiting stock trading after 9/11 because the computer systems didn't work.

BTW, one of the political talking points about people that oppose the price gouging legislation is that they are unpatriotic and unconcerned with our national security. This follows directly from the point about limiting the damage from volatility in the gasoline markets after a crisis (the FTC rules were put in place after 9/11).

Again, if you follow the goal through to limit the damage to GDP (and the incentives actually work) then these types of rules help protect GDP in light of a terrorist attack which disrupts the gasoline market.

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