Economists and Price Spikes

Economists frequently react to events differently than most people. Often, critics of economists will say something like “sure, it’s easy for you to say that because of the position you are in, but if you were in the shoes of someone who has to experience it I bet you’d change your tune!” For example, economists don’t view so-called “price gouging” as a terrible affront – but maybe that’s just because those economists have never been on the receiving end of price gouging, and if they ever were, they’d reconsider. But such critics shouldn’t be so sure. The economist John Cochrane recently explained why his experience being on the receiving end of “price-gouging” was positive:

Uber surge pricing was an important lesson to me. I loved it. I could always get a car if I really needed one, and I could see how much extra I was paying and decide if I didn’t need it. I was grateful that Uber let me pay other people to postpone their trip for a while, and send a loud signal that more drivers are needed. But drivers reported that everyone else hated it and felt cheated.

Cochrane also describes his mother being outraged when they tried to find a hotel room in what turned out to be the midst of Woodstock II. Eventually, they found one at a Super Motel 8 that was going for significantly more than that chain’s typical rate. He tried to reassure his mother that the room being available for a high price was, in fact, a thing to be grateful for:

I tried hard to explain. “If he charged $50, or $100, those rooms would have been gone long ago and we’d be sleeping in the car tonight. Thank him and be grateful! He’s a struggling immigrant, running a business. We don’t need presents from people who run Super-8s in upstate New York.” But, though an amazing, smart, wise, and well-traveled woman, she wasn’t having it. Nothing I could do would persuade her that the hotel owner wasn’t being terrible in “taking advantage of us.”

My own experience of this comes from the other side of things – being in a situation where there was no “price gouging,” and wishing there had been.

This was back in 2016. I was leaving my job at the Medical University of South Carolina in Charleston and moving to Minnesota. Most of my belongings had been picked up by movers several days prior, and I was going to drive out that weekend. However, a few days before I was originally set to leave, Hurricane Matthew would be arriving in Charleston. So I decided to wake up extra early the next morning and hit the road a few days earlier than I initially planned.

When I woke up the next morning, I realized I had screwed up. My gas tank was very low, bordering on empty, and I had a very long drive ahead of me. So, I needed to get gas. And what I found was that even at 4:30 in the morning, every nearby gas station had a tremendously long line for each pump, as people prepared to leave the area ahead of the hurricane. However, the price of gas had not changed at all – no price gouging to be found here! And that was worrying to me.

Everyone needed gas, but not everyone needed it equally. I’m sure that many people in that line, as well as those who had filled up and left in the prior days, had tanks that were near or mostly full but wanted to “top off” before hitting the road. Then there were other people like me, whose gas tanks were running on fumes and who wouldn’t even be able to make it ten minutes down the highway to hit up a gas station in the next town over. In a perfect world, the remaining gas would go to people like me rather than those with mostly full tanks. And that’s exactly the sort of world that price signals will tend to steer us toward. If the price had been allowed to rise, someone who already had three-quarters of a tank of gas might have thought “It’s not worth filling the rest of the way up at this price, I’ll just head out now and get gas when we are a few hours down the road.” Each person who made that kind of decision would leave that much more gas behind for people in a situation like mine, where it really was a “now-or-never” scenario. I’d have cheerfully paid an extra couple of bucks a gallon to be assured of the ability to fill my tank, rather than having a serious risk of getting stranded next to a gas station advertising a “fair” price alongside their empty gas reserves.

Luckily it didn’t come to that – I was eventually able to get to the front of the line and fill the tank. I also noticed that the flow of gas coming out of the pump was slower and weaker than I’ve ever experienced before or since. I was lucky – if I had been an hour later leaving that morning it’s very likely there would have been no more gas left at all, and I’d have been stuck with a hurricane bearing down on me. And I wouldn’t have felt at all like I had been protected or looked out for by the laws that kept the price of gas from rising. John Cochrane was grateful for the high prices he got to pay – and I was immensely distressed at the low prices I had to pay.