There exist some people, usually called “economists,” who have a theory that explains why price ceilings create shortages. Most other people believe that there is no relation between prices and whether shelves are bare or fully stocked. Within this last category, there are those who insist that prices should be prevented from rising when supply decreases or demand increases.
In a recent post (“Why Shortages Are Not More Widespread,” August 17), I wondered why, despite the “price gouging” laws on the books in more than two-thirds of American states (including virtually all the largest ones), shortages were not more widespread; and why prices of meat, poultry, fish, and eggs had been allowed to rise, thereby preventing shortages of them. I wondered if farmers are more immune to the heavy and arbitrary hand of the state.
An article in the Wall Street Journal by agricultural economists Richard Sexton and Daniel Sumner, both at the University of California at Davis, just shed more light on this issue (“New York AG Lays a Rotten Egg,” August 30). At least one large egg producer has been sued, a case I had missed. Small farmers, even if they are official favorites of the state, may now yield before the threat they have perhaps ignored.
On August 11, New York Attorney General Letitia James sued Hillandale Farms, a large producer and supplier of eggs based in Ohio, for having “exploited hardworking New Yorkers” and “made millions by cheating our most vulnerable communities and service members.” It committed these horrible sins by letting consumers bid up the price of eggs instead of finding none on what would otherwise have been bare grocery shelves.
New York State’s “price-gouging” law (General Business Law, Section 396-R) states:
During any abnormal disruption of the market for goods and services vital and necessary for the health, safety and welfare of consumers or the general public, no party within the chain of distribution of such goods or services or both shall sell or offer to sell any such goods or services or both for an amount which represents an unconscionably excessive price. …
This prohibition shall apply to all parties within the chain of distribution, including any manufacturer, supplier, wholesaler, distributor or retail seller of goods or services or both sold by one party to another when the product sold was located in the state prior to the sale.
The law was amended in June and, as the astute reader may guess, not in order to make it less liberticidal but instead to extend its reach. In the quote above, “or services or both” was added after “goods.”
The petition against Hillandale Farms is presented to the Supreme Court of the State of New York on behalf of “the People,” as if it were some sort of super individual à la Jean-Jacques Rousseau. A few quotes:
The People of the State of New York (“the People”) …
The NYAG [New York Attorney General] on behalf of the People, alleges upon information and belief …
The People repeat and re-allege paragraphs 1 through 67.
In their Wall Street Journal piece, Sexton and Sumner report that “price gouging”—which is part of the economic freedom to respond to price signals—motivated egg suppliers to expand their production capacity, with the result that by late-April, “though demand remained high, prices in New York and nationally returned to pre-pandemic levels.” According to the Bureau of Labor Statistics, egg prices at the retail level are still about 6% higher than in February, but they are down 11% from their April peak. This is what we would expect: if prices are not effectively capped, they will soar in an emergency and, as suppliers try to profit from these higher prices, more production will be forthcoming, which will eventually push prices back down—although not necessarily to their original level if demand remains higher and long-term marginal production cost increases.
The efficiency of letting prices respond to conditions of supply and demand is involuntarily confirmed by the Attorney General’s own charts, one of which is reproduced below, representing the invoice prices of eggs sold by Hillandale to Stop & Shop.
One would think that, in “the country of free enterprise” as we used to say, the president would give the Medal of Freedom to Hillandale Farms and other egg producers who made this happen by increasing their production to profit from high prices. (Let’s keep our dreams under control. The current president understands economics as little as the framers of price-gouging laws: he invoked the Defense Production Act precisely to be able to cap the prices of medical goods and PPE, which is why they remain in shortage, contrary to eggs.) The New York Attorney General shows that economics was not her strong subject matter in college, or that she has an illiberal conception of the state, or that she is willing to say anything—as can be verified in two sections of her petition:
50. Hillandale informed the NYAG that its customers have “agreed to” [sic] Hillandale’s pricing practices.
51. To the extent that any such agreements with its customers purport to allow Hillandale to charge unconscionably excessive prices for eggs during an abnormal market disruption, such provisions are illegal, in violation of public policy, and unenforceable under New York law.
The Attorney General might reply that the New York price-gouging law does not forbid a supplier to charge higher prices if his own suppliers charge him more. She claims that Hillandale faced no such higher cost and she is asking the court to force the company to pay her office all egg sales revenues in New York State over and above what they would have been at the prices prevailing in the 30 days preceding its “price gouging.” She is also asking the court to force the company to “disgorge all profits” (among other penalties). How any profit could be left if her first request is granted is another mystery.
She obviously ignores there is always a cost of doing something, which is the opportunity cost of not doing the next most profitable thing instead. The farmer who caters to more hens could instead work elsewhere or take more leisure. And consider that if everybody is forbidden to charge higher market prices (what purchasers are willing to pay) except those who are faced with higher accounting cost, the ones at the beginning of the supply chain—the farmers in our case—will not increase production and shortages will appear and move the chain up to the final consumer. Finally, who trusts government bureaucrats to calculate a private producer’s costs?
Except to those who prefer allocation by government instead of by the market (despite the experience of Venezuela or the Soviet Union), price controls make no sense. (See also my Econlog post “Good Government Greed, Bad Economic Freedom,” August 12.)
READER COMMENTS
andrea mays
Sep 2 2020 at 10:57am
excellent article. Once again, you have provided material for tonight’s “principles” class.
cheers!
Pierre Lemieux
Sep 2 2020 at 5:25pm
Let us know how your students react (given their a priori eggspectations!).
Craig
Sep 2 2020 at 12:04pm
Of course eggs remain subsidized by the government. You are correct of course, price controls are bunk, but I still find it surprising that those who scream for price floors chaff at the imposition of price ceilings. In other words, if you take government subsidies to produce eggs, you’re equitably estopped from complaining that the government restricts you from selling eggs at surge demand prices. Those who seek equity, must do equity.
David S
Sep 2 2020 at 2:03pm
While I understand that mathematically it is correct that production overshoots caused by subsidies are just as bad as production undershoots caused by price ceilings, I believe that in this case it may not be as strong a case.
The problem is that running out of food is BAD. As in, this price of food becomes infinite (or equivalent to the value of X human lives if you prefer) as soon as we don’t have enough to feed everyone at a survival level. Further, the amount of food generated by a given level of production varies randomly.
I think subsidies may be helpful to provide the overproduction needed to avoid starvation during a drought.
As a counter example, just in time manufacturing has crashed during COVID – any delay in the supply chain brings everything to a stop. For cars, not a big deal – they weren’t selling anyway. But it would have been a big deal for food.
Pierre Lemieux
Sep 2 2020 at 5:34pm
@David S: I don’t think you are correct (if I read you correctly). Economic theory strongly (very strongly) suggests that food production guided by market competition and free-market prices is much more capable of preventing hunger and famine than government control and allocation. History confirms that prediction, if only with pre-revolutionary and revolutionary France and famines in the Soviet Union and under Mao. The dramatic reduction in famines in the underdeveloped world over the past few decades was not due to more government control of food, but on the contrary to the relaxation of government planning.
Pierre Lemieux
Sep 2 2020 at 5:23pm
@Craig: You are right: if price ceilings are a detrimental intervention, so are subsidies, and those who call for the latter are not well placed to criticize the former. (Protection of public goods is different, but eggs are not a public good: the whole society cannot eat the egg you are eating.) Note also that, ceteris paribus, subsidized eggs cost less during an emergency (than they would cost otherwise) because the supply curve is pushed down by the subsidies, so that they are not as impacted by price ceilings as they would otherwise be. So subsidies increase the supply of eggs while price ceilings decrease the quantity supplied. Now, ask government bureaucrats how eggs are produced and at what cost! (A reminder on supply and quantity supplied: “A Frequent Confusion and the Yo-Yo Economic Model.”)
Pierre Lemieux
Sep 4 2020 at 10:50am
@Craig: Both your comment and my reply were misleading. An expert in the field tells me that there is no subsidy to egg production in the United States (although perhaps there are exceptions in some states: I don’t know). At any rate, it must be clear what is a subsidy that influences supply. If the government or the grandmother of an egg producer gives him a gift or teaches him English (which is useful with customers), this is not a subsidy to egg production. Your point is valid in a general sense, but only in a general sense: if a producer likes government intervention only when it is in his favor, his policy recommendations must not be taken seriously (just as somebody who would think that taxes or other interventions are inefficient or bad only when they reduce his income).
Craig
Sep 4 2020 at 11:52am
“An expert in the field tells me that there is no subsidy to egg production in the United States”
Fair enough, I suppose I will have to stand corrected on that point!
Ike Coffman
Sep 2 2020 at 3:39pm
I may have missed it, but I don’t believe you showed where the supply of eggs was actually increased during the period prices rose. How much did supply rise due to the higher prices? Or is it possible that supply was shifted from other areas, leaving them with even greater shortages? What exactly were the greater costs associated with the larger supply? To me, there are too many questions to be asked before your claim of Repression of Economic Freedom is proven.
Pierre Lemieux
Sep 2 2020 at 5:12pm
@Ike Coffman: All good questions, but I think easy to answer with basic microeconomic theory. In your order: The increase in quantity supplied and later, probably starting in April or May, in supply (there is a difference) is reported by Sexton and Sumner, and I did not check their sources. But it makes sense: economic theory tells us that when prices rise (and, in the short-run, only if prices rise), quantity supplied increases. It is virtually always the case, and always the case in a recession caused by a production shock, that increased supply of one good implies lower supply of another. Marginal cost always increases in the short-run because physical capital is fixed by definition of the short-run (and in most cases and in the long-run too along the new supply curve); see my post on the toilet paper case for another example. (And keep in mind that, in the short-run, quantity supplied changes; supply changes only in the long-run.)
Garrett
Sep 3 2020 at 8:20am
I think Tesla stock sells for an “unconscionably excessive price.” It’s not going to pay any dividends so people are clearly buying it as a service of entertainment.
I await the NYAG, excuse me, the People, to force the sellers of the stock to disgorge their excessive profits.
Pierre Lemieux
Sep 3 2020 at 6:30pm
@Garret: Not to mention Treasury bonds (and I assume Munis), which also sell at an “unconscionably excessive price.” This might be why to “goods,” they have only added “services” and not “assets” too!
JdL
Sep 3 2020 at 10:37am
It makes my blood boil the way government officials so sanctimoniously forbid goods from being in ready supply, ironically just when everything else is topsy-turvy and anything that keeps needed supplies available is most valuable.
Either of two arguments – practicality or morality – would be sufficient in a rational world to destroy the price-ceiling crowd. I don’t suppose I can buy a ticket to there?
Phil J
Sep 3 2020 at 7:46pm
I have a problem with this analysis. The claim is that production increased when the supplier was able to obtain higher prices. But there’s no reason to believe that long-run consumption increased. During the panic, a change in consumer stockpiling behavior caused a spike in demand, which led to the price increase. But there was no underlying surge in consumption, so the extra capacity is ultimately going to be wasted.
That means that the higher prices paid by NY consumers were ultimately used in shifting production from one supplier to another. The beneficiary was a supplier who was either more agile, i.e. able to expand production quicker; or better at bargaining, i.e. extracted the highest prices during the crisis.
These may be good qualities, but it’s not immediately obvious. I can imagine many New Yorkers might feel aggrieved to think that their money went on shifting market share the Ohio egg industry.
I agree that the government shouldn’t be intervening in prices, but this argument doesn’t give a good reason.
Jon Murphy
Sep 4 2020 at 10:33am
Not necessarily. If prices fall below the level where the new capacity is profitable, then those resources get re-allocated. Maybe those chickens then become more valuable as breeders. Or they become chicken pie. It’s highly unlikely they are “wasted.”
Pierre Lemieux
Sep 4 2020 at 11:00am
@Jon: Indeed. Each producer makes his own guesses. This is in large part why free-market production is efficient. If prices of Christmas (fir) trees increase, each producer has to make a guess as to whether or not he will plant new ones and what will be their prices in eight years’ time (the time it takes them to grow).
Jon Murphy
Sep 4 2020 at 12:52pm
Or if he will harvest early or later.
Pierre Lemieux
Sep 4 2020 at 10:39am
Phil J: Many points of your analysis are economically incorrect. A few comments–in your order: When prices increase or decrease, nobody knows the (possibly multiple) causes for sure. Is it an increase in demand? a decrease in supply? both? in which proportion? Is it permanent? temporary? Don’t count on government bureaucrats to find out. On price signals and knowledge, see Hayek’s 1945 article “The Use of Knowledge in Society”; his example of tin is relevant. Consumers stockpiled in part because they had no incentive to not increase their consumption of something having become scarcer. In fact, when you know or see that price controls will create a real shortage, you have even more of an incentive to stockpile. Higher prices paid by NY consumers served not only to increase production, but also to allocate eggs to their most valued uses. Consumers have no reason to care about “shifting production”–except if an eccentric one wants to pay for this illusion. If a consumer does think that his tiny purchases is “shifting production” and is concerned about that, he is free not to buy. In case of a shortage, on the other hand, he is not free to buy. Remember that buying eggs is an individual choice, not a collective choice (at least in a free society).
Phil H
Sep 4 2020 at 12:44pm
Sorry, I hit the wrong key when posting earlier. This is still the same poster.
Pierre, you’re just talking yourself in knots. Here’s you in the post:
“letting consumers bid up the price of eggs instead of finding none on what would otherwise have been bare grocery shelves”
Now here’s you responding to my comment:
“When prices increase or decrease, nobody knows the (possibly multiple) causes for sure. Is it an increase in demand? a decrease in supply? both?”
Spot the difference?
You can make whatever arguments you like. But when I comment on your post, I’ll generally be commenting on the argument you actually made in the post. Perhaps you have better arguments. But *you didn’t make them in this post*.
Jon Murphy
Sep 4 2020 at 12:51pm
There isn’t a difference. Remember, there are two sides to every transaction: a buyer and a seller. When market prices rise, that necessarily means that buyers are bidding up the price. That is, they are offering (ie agreeing to) higher prices than before. The buyer may not know why he has to offer a higher price o induce the seller to sell to him, and he doesn’t have to.
Jon Murphy
Sep 4 2020 at 10:48am
You don’t think New Yorkers having a steady supply of eggs is a good quality?
Pierre Lemieux
Sep 4 2020 at 11:08am
Indeed. And letting consumers bid up prices is a crucial advantage of a market economy.
@Phil J: Consider that the free market is a permanent auction: see my post on this topic.
Jon Murphy
Sep 4 2020 at 11:32am
To make a larger point on Phil J’s comment, because multiple people have raised the same objection: there are countless ways a firm can increase production without necessarily adding capital equipment that would later be “wasted.” The producer can run his equipment/resources at a higher speed (eg., overtime, delay repair and maintenance in order to keep machines working, temporary workers, rent equipment, etc).
There are countless ways people can adjust to changes in prices. As Pierre says to me above, one of the benefits of freedom, of voluntarism, is that it allows people these countless margins. They can find the alternative arrangements that best suit their situation.
Phil H
Sep 4 2020 at 1:00pm
Once again, same commenter, the J was a typo.
Why are you trying to make an artificial distinction between different kinds of capital?
It doesn’t matter in what form (machinery/overtime) the company injected extra capital into their business to increase production. They injected extra capital. But there was (so far as we know) no extra consumption (though there was extra stockpiling). So at some point, there will be some overcapacity in egg production. That’s just accounting.
Believe it or not, I actually agree with both PL and you that the government should not intervene in prices. The problem is that PL made a bad argument above. He said:
“give the Medal of Freedom to Hillandale Farms [for] increasing their production”
And this is simply not a strong case. There is no long-term need for increased production of eggs (unlike, for example PPE). It would be weird to give a medal to someone for doing something unnecessary.
If PL wants to make strong arguments, rather than just preaching to the choir here, he can consider taking critical comments into consideration, as well as all the vigorous yesses from his fellow travellers. But of course, he’s free to make his own choices.
Jon Murphy
Sep 4 2020 at 1:30pm
I had suspected that given the tone and style were similar, but wasn’t sure.
Because the distinction matters a lot. If some producer thinks relative prices will remain high for the long term, he’ll take different actions than if he thinks they’ll be relatively high for the short term. In the short term, you can do certain actions for lower cost than others. In the long term, it’s different. Capital is not homogeneous, as you suggest.
Then there was extra consumption as the term is used in economics.
Again, I remind you we are talking economics here, not accounting. Confusion between the two terms leads to all sorts of mischief (see, for example, the myriad of people who think a trade deficit is bad for an economy).
But, to the extent there is “overcapacity” (which I assume you mean quantity supplied exceeds quantity demanded, which necessarily means prices begin to fall), then again the type of action taken by the producer to increase production during the price rise matters. If they did short-run things, then they can easily reduce production: stop paying overtime, go back to a normal repair/maintenance schedule, stop outsourcing work, etc etc etc. There are countless ways they can, and do, adjust.
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