The Cognitive Bias behind Anti–Price Gouging Laws
People often believe that price gouging is so obviously immoral that making it illegal is the equivalent of criminalizing theft. In their minds, sellers who drastically hike their prices after a supply or demand shock are simply cruel capitalists taking advantage of poor consumers, who are practically forced to hand over their money.
The student of economics, of course, would sooner laud this practice than condemn it. After all, price changes are an important part of the market process because they help us economize scarce resources.
In theory, then, all that must be done is to explain this process to the public. A little bit of reasoning and a few graphs are all it should take to dispel this misguided objection to market prices. Yet somehow, it rarely seems to work. Economists have been trying for decades to break the irrational opposition to price gouging, but they have had little success. As it turns out, the art of shaping public opinion is somewhat different from the art of explaining economic phenomena.
Ludwig von Mises draws attention to this distinction in the final pages of Human Action. “The flowering of human society,” he writes, “depends on two factors: the intellectual power of outstanding men to conceive sound social and economic theories, and the ability of these or other men to make these ideologies palatable to the majority.”
How, then, can public opinion be shaped? Perhaps the answer lies in psychology. After all, “irrational” is a psychological word, not an economic one. So maybe the key is not so much to explain economic principles, but to identify and debunk the various biases that give rise to the public’s antimarket beliefs.
Price gouging, I believe, provides an illustrative example of how this can be done.
Step 1: Identify a Potential Bias
Assuming that a psychological bias is underpinning the public’s objection to a certain economic principle, the logical first step is to identify what bias might be at work. To do this, it’s instructive to look closely at what exactly the public is objecting to.
In the case of price gouging, for instance, it’s worth noting that the public is not objecting to high prices per se, as we might expect, nor are they objecting to a gradual increase in prices. What really grinds their gears is a rapid change in the price. To put it technically, their fundamental complaint is that the first derivative of price over time is too high. This fact is
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