While the Democrats and President Trump have expressed support for reducing the cost of pharmaceuticals, Senate Majority Leader Mitch McConnell has made it clear that he will oppose efforts to impose price controls, saying that “Socialist price controls will do a lot of left-wing damage to the healthcare system.” This does not, of course, entail that McConnel would oppose all efforts to reduce the cost of drugs, but it does seem to express a general opposition to the state engaging in efforts to control prices. This view is typically defended on free market grounds: the market should set the prices for products rather than the state. The stock moral argument, going back to the beginning of capitalism, is that everyone will be better off this way.
One obvious problem with defending drug pricing on free market grounds is that the pharmaceutical industry is largely based on the state enforcing drug patents—that is, the state uses its coercive power to ensure that the market is restricted rather than free. While it is reasonable to debate what regulations, if any, should exist the fact that this sort of regulation is accepted does open the door to additional regulation. To use an analogy, if someone says that they will oppose all efforts for their family to have a pet on the grounds of the principle of the pet-free house and yet they already have a dog, then the door would thus seem to be open to more pets. After all, the principle has already been violated. This does not preclude debating about whether to get another pet but justifying not getting another pet by appealing to the no-pet policy would be absurd. As such, the free-market argument is rather problematic—unless companies are willing to fully embrace the free market. This does not provide a positive argument for price control, at best it takes away an argument against it. I now turn to an argument for price control of certain drugs.
My adopted state of Florida is routinely ravaged by hurricanes and other disasters. In the past, free-marketeers used these disasters as opportunities to use the law of supply and demand to the fullest: they charged people exorbitant prices for goods and services that were in demand because of the disaster. Detractors of this free-market approach labeled this entrepreneurship “price-gouging” and Florida responded by protecting consumers. The gist is that it is unlawful during a state of emergency to charge prices that are unconscionable. From a moral standpoint, the justification for this protection is that is morally wrong to use an emergency to coerce people into paying excessive prices. This is clearly a limit on how the free market sets prices and would seem to set a moral and legal precedent for taking an analogous approach to drug pricing.
As noted, what makes price gouging in an emergency unethical is using basic needs in a disaster as a means of coercing people into paying higher prices. The same principle would apply by analogy to drug pricing for medically necessary drugs. To use medical necessity to coerce people into paying higher prices would thus be at least as wrong as using an emergency to coerce people into playing more for important goods and services.
It could be objected that charging high prices for drugs is not gouging when the high price is the normal price. To use an analogy, charging a high price for generators during a disaster would not be gouging if that was the normal price for the generators. The counter to this is to point out that the price can be compared to the prices paid in other countries (adjusting for relevant factors) for the same drug. So, if Americans are paying exorbitant sums for the same medication that is available in Canada for far less, then Americans are being gouged. Gouging an also occur when the price is increased-such as is the case with insulin. Intuitively, price gouging can also take place even when the “normal” price is high—this is because gouging is a matter of coercion and not just a matter of comparing prices.
Given the above, it is morally and legally acceptable for the state to limit price gouging during emergencies, then it is also legally and morally acceptable for the state to do the same for medically necessary drugs. This is based on the principle that using legitimate needs to coerce people into paying excessive prices is morally unacceptable.
I agree with your conclusion, even though that is not an argument I would make.
In the case of emergencies, the people who are selling things at a huge markup are those who had the foresight and did the work and invested the time and resources to bring them where they would be most needed, and it is natural that they should be rewarded for that. However, when huge numbers of people are fearful and suffering and even dying, I support the government stepping in to prevent them being denied access to basic necessities because of excessive price. It’s one of those exceptions justified by the need for a cohesive society.
In the case of healthcare, and specifically here drug prices, we have a different landscape. The US does not have anything approaching a free market in healthcare. The economics of healthcare in the US are twisted, deformed, and distorted by a maze of special-interest legislation so thick that the last time I tried to look, I couldn’t even find a clear area near the border.
Among tens of thousands of examples, I will refer to one big one: the government is not allowed to negotiate drug prices for Medicare. An alleged free market in which the largest consumer is prohibited from choice is not a free market.
This is underlaid by the government-imposed monopoly on patents, the extreme government-imposed regulation of production, the network of local monopolies of hospitals,and the quasi-cartel nature of health insurance in the US. Perverse incentives are everywhere.
As I see it, the whole US healthcare system is insane. I can’t say much more, because the thicket is so dense I can’t even begin to get a handle on it. It took me about three months of reading IPCC AR4 WG1 to decide that not only did I not understand the climate, but the people who claim to don’t understand it well enough to make reliable models either. I think the economics of the US health market cannot be so difficult in principle, but is at least as opaque, and far less worthy of my time than climate.
Against the backdrop of a rigged market, I would support the imposition of price protections, not as the right answer, but as a mitigation pending the restructuring of the whole irredeemable mess.
those who had the foresight and did the work and invested the time and resources to bring them where they would be most needed, and it is natural that they should be rewarded for that.
I think you’re somewhat missing the point here. And thus one of the problems with “price gouging” laws. There are somewhat significant costs with interrupting pre-established, standard operating procedure supply lines. Those costs need to be passed on to consumers. It’s not so much about making “obscene” profits as it is about recouping added costs.
On a personal, empirical note regarding Hurricane Dorian. The panic that the media and similar started here in Central Florida, when this thing was at least FIVE DAYS OUT, was itself a danger.
And please let’s not pretend that Home Depot, Publix, etc. aren’t making a good bit of money that way with an artificial spike in demand across a broad geographic area. There is no reason for such an absurd panic like what I saw on August 28 both at WaWa’s (gas station, mostly) and Publix (supermarket) should have been happening at that time. There is no reason supplies and such and proper preparation cannot start 2-3 days at the max, for inland people, before earliest predicted landfall. And again, going into hurricane season everyone in Florida should do at least a cursory check of things that they can store or be ready to store away such that when a hurricane approaches you only need to pick up a few things. One big problem may be that so many people move here from up north, I heard a number of around 22K a year, that they lack real-life experience with these things and are thus much more vulnerable to media and government infused panic.
Also, I’d like to point out (again here?) that on August 28 I said (OK, this part not here) that thing was as likely to hit Cape Hatteras as hit Cocoa Beach. I’ll leave it to you to look up where the eye made landfall in the US.
And on another note, the media and such could do people a significant favor by pointing out that water comes right out of your tap. And yes, you can store it for more than 72 hours. Where the stupid people got this stupid idea that water goes bad after three days is beyond me.
And another point. People on barrier islands, or islands like the Bahamas, definitely need to be prepared to go several days without water and supplies, though most of them really should evacuated. But people further inland, to scare people to go into such a panic when resupply is easily available in the worst of conditions, is itself significantly immoral. But where’s the pressure on our government and our media to clarify these things instead of spreading panic far and wide?
As for your points about healthcare, agree. Notice how the attempts by government regulation and such, which are supposed to keep these costs under control have actually caused them to skyrocket. Similar with so-called academia. It’s sick, the price of medicine. Or so sang some guys back in the 80’s who themselves almost got it but of course, they had only opened up their eyes long enough to check that they were asleep. It’s Teh Narrative, you see.
Michael LaBossiere says
The law is not aimed at punishing people with foresight nor does it forbid people from taking into account increased costs. For example, if I am selling generators and it now costs me $50 extra per generator to get them into the disaster zone, I am not gouging if I pass that on to the consumer. But if I am selling generators at a 500% markup because I know people are desperate, then I would be gouging.
You’ve never run or been party to a serious business. The law is vague and dangerously untested (from a defendant perspective) using ridiculously subjective words such as “unconscionable” and thus discourages price increases. I saw ZERO price increases as demand rose. This is why there were shortages. In Gainesville, of all places. Prices on existing inventory need to rise to provide revenue to purchase the newly limited resources. Owners need to pay employees and suppliers more for overtime, demand (and thus costs) for supply trucks increase, etc. and it’s simply not worth taking on the legal risk by rapidly raising prices to cover those new costs. Who knows what some jury will decide 6 months or 6 years from now? We’ve been over and over these things before in other contexts and you simply refuse to make an effort to understand these things. Short of a market wide monopoly, the price of goods in an emergency situation will conform to the market value/costs because high prices bring in extra supply and extra competition which keeps things far more stable than a centrally planned economic effort.
But let’s just take for example your unlikely scenario. You have generators. Should it be more or less legal for you to sell those generators for 500% more (I note your example makes no mention of the increased costs I referenced above) versus not selling them at all? We’re talking law here, not morals. Two very different things.
So we’re now discussing the ethical and policy value of an anti-gouging law?
What a law is intended to do, and what effects it actually has, are two very different things. For that matter, it’s not always clear that a given law had a specific intention. The wording of laws is often a compromise based on the need to attract enough votes. Did all of the supporters have exactly the same intentions? Unlikely.
I didn’t know Florida’s price-gouging law, so I looked it up. Florida Statute 501.160 refers to “unconscionable” prices, defined as those with a “gross disparity” to nomal prices. It gets no clearer than that. Neither does it delegate decisional authority to define what these might mean in what sectors and in what circumstances to any other regulatory body. This is a dereliction of duty by the lawmakers. I stand by my support of a law against price gouging, but the people who made that law needed to take responsibility for defining the line between price-gouging and normal market price signals in the case of very limited supply. Without that line, WTP’s account of no price increases is a tragedy. It means that there was no deterrent for individuals to hoard or resell in a black market of their own.
Far better to have gas at $20 per gallon than no gas at all.
Washed up among the wreckage of Hurricane Harvey is an old debate: Price Gouging—Heinous Crime or Useful Tool?
When a natural disaster like Harvey monkeywrenches the normal operations of daily life, basic necessities suddenly become scarce, and merchants often start charging much more for them. In Texas, The Washington Post reported last week, “One station sold gas for a whopping $20 a gallon. A hotel reportedly charged guests more than twice the normal rate. One business sold bottles of water for a staggering $99 per case—more than 10 times some of the prices seen online.”
On first impression this seems downright evil: greedy businesses taking advantage of desperate people to line their own pockets. There oughtta be a law against it!
There is. Texas has a law against price gouging. So does Virginia. So do many other states. But as economists point out time and again, jacking up prices in an emergency actually serves socially useful purposes.
For starters, it prevents hoarding. A husband and father who doesn’t know how long his town will be without gasoline or drinking water might be inclined to buy as much as he can haul away. If several people do that, supplies run out quickly.
That’s exactly what happened nine years ago during Hurricane Ike. “Area and state consumers were in what can only be described as panic buying Friday as gasoline prices spiked,” according to press accounts from Tennessee. WSLS in Roanoke, Va., reported that gasoline stations ran dry because the hurricane had “put people into a frenzy.”
On the other hand, a consumer who would buy 10 cases of water at $10 per case is likely to buy much less at $100 a case—thereby leaving more for others. This is the market’s extremely efficient way of rationing scarce goods.
Even those sharply critical of price gouging concede the correctness of such observations. The Los Angeles Times’ Michael Hiltzik, for instance, acknowledges that the “textbook economics” of price-gouging are “irreproachable.” But he and others still find it objectionable.
They find it objectionable, first, because they consider price spikes morally wrong. Behind the objection lies an unspoken assumption: that there must be some morally correct price for a consumer good, independent of the wishes of the person selling it. Yet a merchant has no moral obligation to sell his goods in the first place. A grocer who closes his store so he can evacuate the city is not breaking any cosmic moral laws, for instance. And if a merchant has no moral duty to sell something at all, then it makes little sense to say he has a duty to sell it at a certain price.
See my reply above to CH. I was in Gainesville on August 30 for an overnight stop on a planned trip to Georgia. Gainesville. Where there has NEVER in modern history been a broad hurricane-induced disaster of a scale that would justify such panic. But G’ville being home to a lot of young people and their never-grew-up professors, who are easily whipped into a panic about nearly anything, was out of gas. Checking Gas Buddies app, there were maybe 2 or 3 stations in the entire city that at any one time had some gas. And thus loooong lines of cars. Gainesville didn’t need to be slurping up supplies that potentially would have been better needed elsewhere. If prices were permitted to rise in Gainesville, I think SOME people may have thought twice about wetting their pants.
Michael LaBossiere says
There is merit to using an increase in price to limit harm; for example, if polluting cost businesses more, they would do less of it. But the increase should be enough to limit harm and not enough to inflict harm. For example, overcharging businesses for polluting would be bad-it would put businesses out of business and damage the economy.
While merchants have no obligation to be merchants or take special risks (staying to sell during an evacuation, for example), they are not thus free of moral obligations. If a merchant is selling tainted meat to make a profit, they are in the wrong because they are causing harm. If they are gouging because they have what people cannot do without, they are morally on par with a thief who is robbing a merchant in their store–getting their money because they value their life more.
Morality is one thing. That’s between you and your conscience and/or Maker. Price gouging laws are about…law. See my comments above.