Price gouging and the elasticity of supply

Jeff writes:

…in fact it is quite typical for the consumer surplus maximizing solution to be a rationing system with a price below market clearing. I devoted a series of posts to this point last year. The basic idea is that the efficiency gains you get from separating the high-values from the low-values can be more than offset by the high prices necessary to achieve that and the corresponding loss of consumer surplus.

Why would we only care about consumers’ surplus and not also the surplus that goes to producers? We normally we care about producer’s surplus because that’s what gives producers an incentive to produce in the first place.  But remember that a natural disaster has occurred. It wasn’t expected. Production already happened. Whatever we decide to do when that unexpected event occurs will have no effect on production decisions. We get a freebie chance to maximize consumer’s surplus without negative incentive effects on producers.

This is a very clever post and it provides much to think about.  But I don’t accept the main premise that supply is inelastic.  Last night most stores were closed!  At higher prices more of them might have opened, and in fact in most places it was logistically possible to have a store open in Fairfax.  There might also be effects from mechanisms such as “should I leave these flashlights out for sale, or take the extra home to the family?”  Furthermore the periodic demand for batteries, flashlights, bottled water, etc. around here has become (sadly) a regular event, where longer-run “option ready” supply arguably is linked to precedents from previous experience.


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