Prizes Are Premiums – by Maxwell Tabarrok

A man just robbed a train. A Rock Island Rail car was held up in the North Texas desert en route from Chicago carrying dozens of passengers and tens of thousands of dollars in a Wells Fargo express compartment. The men were killed and the women and children were kidnapped.

You are the sheriff in charge of the investigation. In a case like this, putting a bounty on the man’s head is a proven procedure. That makes everyone interested in finding this man and bringing him to justice. An everyday 2-bit robber might get a bounty of a thousand or ten, but this is an emergency. You’ve set the bounty at $200,000, dead or alive.

This bandit won’t get away easily.

Of two major hurricanes “Price gouging” has been in the news in recent weeks. Be that as it may $10 for a gallon of gas in North Carolina or $2,000 flights From Tampa, charging high prices during an emergency is extremely unpopular.

The reasoning is intuitive: when someone is in a desperate situation, he may be willing to pay high prices for basic goods such as gas or water, but charging them these high prices takes advantage of his misfortune.

But imagine if you were the sheriff of Ashville, NC, and your job was to get more gas and bring it into town. You could offer a $10 per gallon bounty, dead or alive. That’s much more than the usual daily premium, but this is an emergency. Anyone who can get gas in western North Carolina should be rewarded, because that’s where people need it most.

Prices are not just a transfer between buyer and seller. They are also a signal and incentive for the entire global economy to get more expensive goods into the high-paying area; they are a reward.

Whether you’re after train gangs or gas, the last thing you’d want if you were the sheriff is a limit on the bounty price you can set.

High prices for essential goods during an emergency are WANTED posters, sent across the global economy, begging everyone to take action and catch the perpetrator.

The difficulty many people face in paying these higher prices is a serious tragedy, which can be alleviated by a swift government response, such as sending relief funds and shipping supplies. But lowering prices does not mean everyone has access to scarce and expensive essential goods. In an emergency, there simply aren’t enough for everyone to move around.

The central problem remains unresolved: a criminal is on the loose and a hurricane has made it difficult to get these goods where they are needed. Setting low prices could mean that the few liters of gas, bottled water or flights available are allocated to people who get them first, or who can get them first. wait in line the longest, rather than based on who is willing to pay, but it is not clear that these allocations are more egalitarian.

What is clear is that these assignments are less likely to bring the perpetrator to justice getting more goods where they are needed.

If there’s an emergency and there’s a criminal on the loose, we want the sheriff to set the bounty high and catch them quickly. High prices during other emergencies work the same way. Let the sheriff of the price system do his job!