Teaching Me Some Economics to The Economist

(Don Boudreaux)

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Here’s a letter to The Economist:

Sir:

Your case for prohibiting, during times of crisis, so-called “price gouging” is confused (“Many economists defend disaster profiteers. They are wrong”, April 11^th).

To begin, contrary to your implication, nothing in economists’ argument against such restrictions implies that government should not subsidize the production of goods that are in short supply. Whether or not such subsidies are justified is a separate question an affirmative answer to which is not precluded by opposition to price-control legislation.

More fundamentally, while appearing to counter economists’ argument that higher prices spur greater production of goods in high demand, you in one instance offer evidence in support of their argument and in another case dodge their argument altogether

The evidence that you inadvertently offer in support of allowing prices to rise to market-clearing levels is your acknowledgment that “the manufacture of masks … might look simple, but producers need sterile factories and sophisticated machinery to churn out melt-blown fabric.”  Indeed. But it is precisely firms’ need to incur these unusually high costs, and to do so with uncommon speed, that justifies – and explains – the very high prices that you inexplicably oppose. If ramping up production quickly were easy and inexpensive, prices would hardly rise at all.

You dodge economists’ argument against price controls when you identify regulation rather than profit as a motivation that recently incited some producers to accelerate production of masks. But so what? No economist has ever denied the obvious reality that government can compel or coax producers in the short run to increase outputs without raising prices. This reality, however – and unlike higher prices – ensures neither that industry will retain sufficient capacity to ramp up output over the long run, nor that the increased quantities produced in the short-run will find their way into the hand of buyers most in need of the goods.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030