Notice that Dave "takes issue with this notion" without offering any supporting evidence of any sort. Neither economic theory nor empirical studies support his wild fantasies about price control's ability to "increase people's faith in market transactions" (when did the substitution of the market by personal connections increase the faith in market transactions? Has he ever heard of the non-market distribution systems, like the Soviet one? That increased the faith in market transactions alright… as did gas rationing in the US in the 70s… as does rent control… as does food-distribution system in modern Africa). Likewise, neither theory nor empirics support his claim that price controls reduce panic demand without increasing price (When did that ever happen?). There is also zero evidence that in emergencies, markets don't clear in rational ways. To the contrary, every emergency area, war zone, and concentration camp has developed robust black markets, which function very rationally.

Dave's post was quite sad, actually. The last paragraph said it all – disliking price gouging is such a morally superior position that anyone who disagrees with Dave’s fantasies on the subject of government regulation is morally depraved.

I second Kate's comments with respect to the lack of evidence for some pretty aggressive empirical claims.

The one that caught my eye was that "the regulations - when publicized appropriately - have the same information forcing effect as higher prices themselves, teaching people that there are supply interruptions and they should change their use patterns until conditions improve."

The same effect? I am highly skeptical that people respond to incentives in higher prices in the same way that they would respond to appropriately publicized public service announcements. I am also am unfamiliar with what it means to use "soft economics" to achieve better results than the market.

Well, I would have liked to see comments to my post appear there (and it would seem fair), but I can respond here too.

Kate: Yes, I've heard of the Soviet system. As a matter of fact, you've mentioned it to me before. I'm pretty sure if you re-read my post, I was making a limited claim that short term threats to punish price gouging have special advantages that long term price controls do not. As for lack of empirical support, I wasn't aware that I had to provide any - especially when the claim I was responding to - that taking large profits in times of civil unrest reduces demand - didn't cite data either. Instead, the argument relies on assumptions about rational market participants that I think the data do not support. As for your last comment, I'd ask you to go read the post I was commenting on, which I think makes the flip of the claim (i.e., that to defend price gouging regulation is itself symptomatic of dubious motives) and decide how seriously to take my comment. I'm sorry you found my post sad. I intended it to be thought-provoking.

Joshua: The claim is that higher prices provide folks with needed information (supply is short). I think it has to be true that when the attorney general goes on the air to say "We're going to enforce our price gouging regulations" citizens are similarly informed about the scarcity of the good. I agree that the question of whether the change in *usage* patterns is the same is an empirical question, but you've misread me if you think I claim that the question is closed.

Let's assume that we have a sudden shortage of a product which is a relative necessity and demand is largely inelastic. If we assume that there are no real substitutes, and that a black market will not develop (due to the short-term nature of the problem and/or high penalties for participating in such a market), is it crystal clear that we want distribution of the good to be determined by price? Here's an example that Mr. Murray gave in his TCS column:

Ah, but what of the hotel owner who has a captive market? Surely they are gouging people when they increase their rates when evacuees show up? Again, the higher price actually helps people. The evacuee is generally willing to pay more for overnight accommodation than the casual traveler because the evacuee has fewer options. Therefore, a higher price actually deters those who don't really need the rooms in favor of those who do. The result is more rooms available for those who really need them.

I think the problem with that solution is obvious: the evacuees may "need" the room more than the casual traveler, but the casual traveler may in fact be able and willing to pay much more than the evacuee. However, the evacuee may be willing to wait a long time to secure the good, while the casual traveler would be deterred by a long wait.

I suppose the proper response is: in times of emergency, the government should step in to help those specifically affected with cash distributions, so that they can overcome the effects of the disaster. But do we necessarily want that money going to merchants who charge higher prices due to scarcity? (Particularly when, as in the hotel example, the costs of producing or securing the good have not changed.)

"There is also zero evidence that in emergencies, markets don't clear in rational ways. To the contrary, every emergency area, war zone, and concentration camp has developed robust black markets, which function very rationally."

I'm dubious, Kate. Markets clear best when information/search costs are low -- i.e., when you can comparison shop. An "emergency" likely features folks unable to spend time searching, unable to risk the chance that this will be the last seller in sight, and therefore subjected to monopoly power. Worse, it may be only perceived monopoly power, because it is unknown whether this seller is the only one around.

I don't think that suggesting the fallibility of markets is nearly so ridiculous that it is fair to call it "sad," a "wild fantasy," or whetever other hyperbole comes to the mind of someone with greater faith in unrestricted free markets. Indeed, a great many free-marketeers might view "emergencies" a narrow exception to their stances against regulation.

Scott:

1. Low information costs are neither necessary nor sufficient for markets to clear.

2. The absence of a monopoly (or perceived monopoly) is neither necessary nor sufficient for markets to clear.

3. I never said that free markets are infallible. I just said they are better than non-market-based distribution systems.

4. There is not a shred of empirical evidence showing that markets fail to clear in times of emergencies. Dave still hasn't produced such evidence, even after being challenged by both me and Josh. Robust black markets that emerge in every emergency zone is the evidence to the contrary.

5. I am not responsible for what other free-marketeers believe. We are not an invitation-only club.

Matt:

Handing out money/vouchers to disaster victims increases the supply of needed goods. E.g., if housing vouchers were easily cashed at the bank, many people might be renting rooms in their homes to NOLA refugees. Many landlords might be willing to fill in apartments that currently stay empty. Many developers might be putting up emergency shelters well-equipped with electricity and running water.

Likewise, if food-and-other-necessities vouchers were easily cashed, people would rush truckloads of food, diapers, toothbrushes, and clothing to disaster areas. Alternative: waiting weeks for the government to deliver the same stuff.

We can say it stinks that someone profits off other people's misery, but I would take the world where food, diapers, and housing are increased in supply and available for all disaster victims over the world where necessities are theoretically cheap, but not available to people without connections. And I don't even need to cite the famous:

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."
Adam Smith

Kate: One minor follow-up is that I don't know that it's fair to repeatedly (i.e., in both of your posts) hit Dave for not producing empirical evidence.

You'd have to concede that blog postings necessarily can't survey all relevant empirical evidence. For example, in your initial post, you assert: "There is also zero evidence that in emergencies, markets don't clear in rational ways. To the contrary, every emergency area, war zone, and concentration camp has developed robust black markets, which function very rationally." In your follow-up, you assert, "Robust black markets that emerge in every emergency zone is the evidence to the contrary."

I don't know that there's been meaningful study of every single emergency zone. Many emergence zones, by being such dire emergencies that civil society breaks down, don't allow for meaningful study. Have you evidence of not only black markets, but "robust" black markets that "function very rationally"? I think you're going beyond the empirical evidence yourself.

But my main point is that we can't fault Dave for not giving us a boatload of citations or for not undertaking an empirical study. If he did these things, it'd be a law review article, not a blog post. If we criticize blog posts for not producing supporting empirical evidence... well, that's a shot that can be taken at any blog post (except for some of Volokh's, some of which are virtually law review articles!), which is to say it doesn't prove much.

I think it is important here to distinguish between seller monopoly power and a change in supply conditions.

Scott, your comments seem to concerned with the former rather than the latter (or perhaps both?). You are surely correct that markets may be more competitive when search costs are low. But I dont think that is a problem here. And as Kate points out, markets clear under monopoly conditions, but there is loss of social welfare due the seller's ability to create artificial scarcity.

The scarcity here is VERY real. The increase in price is not a function of the elimination of competition such that there is now a seller of necessary goods with monopoly power. The increase is due to a change in supply conditions faced by all competing sellers. Let me know if I misunderstand what you are saying here.

I think Matt nails the question when he says "But do we necessarily want that money going to merchants who charge higher prices due to scarcity?" From an economic perspective, I think the answer is clearly yes. We want higher prices to allocate the scarce resource to its most valued use, and we want higher prices to send valuable information to the market to attract more supply.

Surely, a byproduct of this is that today's sellers get a windfall because supply conditions have changed. I dont have a problem with this. Many do, but my question to them would be to show me a non-market allocation mechanism that is superior on these dimensions. As I stated before, I dont think there is any empirical evidence that one exists.

I suppose I was imagining a situation where demand and supply were both fairly inelastic, like the hotel example offered by Mr. Murray in his column. I agree that if high prices could actually increase the supply in response to scarcity, the pricing mechanism is doing its job. And in most cases, supply will be elastic enough to accommodate an expansion in response to scarcity. But if you have a finite supply which is greatly exceeded by demand, you have to allocate, and allocating based on who can pay the most may be unfair in some circumstances. (They who can pay the most may not be those who *need* it most.) However, these circumstances may not exist all that often. I don't think gas is like the hypothetical hotel room -- it may be a necessity, but there are substitutes, conservation measures could be taken, and high prices may encourage greater production, etc.

Austan Goolsbee has an interesting post (with empirical evidence!) up on Slate about price gouging occuring not during the initial scarcity, but instead hanging on after the crisis has passed. As he notes, "gouging, if it occurs, typically begins when the stations' costs start to come down again. The stations in the study took about twice as long to cut prices when their costs decreased as they had to raise them on the way up. It was after a crisis ended that their profit margins shot up." I'd be interested to hear other folks' thoughts on this. It sounds like these results would contradict standard economic theory, which would say that at least one station would cut its prices as soon as it could, leading to a chain reaction where all of them would eventually come down to the proper market price.
Here's the link: http://www.slate.com/id/2125814/

Scott: I am with you on not demanding full citations to every well-known claim that a person makes in a blog. Such demands only retard the conversation.

But when someone makes a claim that (a) contradicts modern econ theory (that markets clear prices even when info is very poor and monopolists are present); (b) contradicts well-known evidence on the behavior of markets (that market-based distribution systems do not cause panic and overconsumption, but personal-connection (or lottery, or whatever else) based distribution systems cause panic and overconsumption – and this is true for long-term and short-term substitution of markets by alternative distribution schemes); (c) contradicts lots of case studies and anecdotal evidence about the emergence of black markets in the least regulated and most “panicked” environments – then, such contrarian would have to show the basis for his claims. Notice that I didn’t ask for “peer-reviewed, high-quality econometric studies.” Any empirical evidence coming from a reputable source would do. Or, for that matter, any decent theoretical model.

Otherwise, counter-intuitive, counter-theoretical, and counter-common-knowledge claims are appropriately called “fantasies” (and many people would have used a much harsher word here).