<blockquote>
<p>Why do economists deliberately conflate willingness and ability to pay in the context of price signals and price gouging?</p>
</blockquote>
<p>They don’t.</p>
<p>Willingness to pay in economics is defined as maximum price someone is actually prepared to pay on market for certain quantity of x (e.g. see discussion in Mankiw Principles of Economics Ch 7), and is derived from people’s <strong>constrained</strong> choice. You seem to deliberately try to ignore it and manufacture some new terminology and distinctions that do not exist.</p>
<p>For example, if person's budget constraint is given by <span class="math-container">$m = px + qy$</span>, where <span class="math-container">$m$</span> is the person's budget, so ability to pay/purchase goods and services, and utility is given by <span class="math-container">$u=x^{0.5}y^{0.5}$</span> then the agent's inverse demand function, which represents agent's <strong>willingness to pay</strong> for certain quantity of <span class="math-container">$x$</span> is <span class="math-container">$p=0.5m/x$</span>.</p>
<p>So for example, if persons income is 100 dollars, at <span class="math-container">$x=10$</span> they are <strong>willing to pay</strong> 5 and so on. Hence, people’s budgets are already factored in. If someone is not able to afford water because their budget constraint is set to 0, then also their willingness to pay will be 0.</p>
<p>Saying they would be willing to pay more in counterfactual world, where their income is higher <span class="math-container">$m&gt;0$</span>, doesn’t invalidate the fact that in this world their budget is <span class="math-container">$m=0$</span>, and hence when they are making a <strong>constrained</strong> choice they are only willing to pay 0.</p>
<p>Consequently willingness to pay depends on ability to pay. Ability to pay <strong>is already factored in willingness to pay</strong>. Hence, clearly mathematically poor person is actually willing to pay less for water or food, and so on. This is trivially true by definition. This doesn’t make person careless, this is again result of constrained choice.</p>
<p>So it is not dishonest to say that someone with low budget is not willing to pay exorbitant price for basic necessities. In fact it’s the opposite, it is dishonest to argue that they are willing to pay that, when clearly given their low income they cannot pay that and thus they are not willing to pay that as explained above.</p>
<p>Next, your question goes on some rant that that obscures the question so I will summarize it in;</p>
<blockquote>
<p>Does increasing price help to resolve shortages when there is income inequality?</p>
</blockquote>
<p>Yes it does.</p>
<ol>
<li>Continuing the previous example, using the demand function we derived;</li>
</ol>
<p><span class="math-container">$$ x= 0.5m/p$$</span></p>
<p>Suppose we have two people with same preferences but different incomes. A rich person with <span class="math-container">$m= 1000$</span> and poor person with income <span class="math-container">$m=100$</span>.</p>
<p>Then let’s assume the original price of good <span class="math-container">$x$</span> which can be water if you want is 1 per unit. In that case the rich person will demand 500 units of water and poor person 50 units of water. So the overall consumption of water is 550 units.</p>
<p>Now let’s increase price of water 10x, now the rich person demands 50 units of water and poor person just 5 units of water.</p>
<p>The water is still conserved which helps to reduce the shortage. You might not like the distributional consequences, fair enough, but it is facetious to argue it doesn’t.t help to reduce shortages.</p>
<p>In addition, prices do not affect just demand side but also supply side. On supply side higher price incentivizes companies to produce more water.</p>
<ol start="2">
<li>Aside from the above theory, it is well established <strong>empirically</strong> that price hikes help resolve shortages (e.g. see Chakraborti &amp; Roberts 2021). If anything it’s other way around the empirical evidence shows that the “anti-price gauging” regulation leads to more hoarding.</li>
</ol>
<p>Reasoning based on false premises is not valid reasoning, and in your post you often just state something, without any reference to empirical evidence or accepted axioms. You also already seem to have pre-set conclusions and you are just trying to change preexisting and generally accepted economic terminology to fit your conclusions. That is also not valid reasoning.</p>

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2024-09-26T21:03:20.733Z
2024-09-26T21:09:51.840Z
2024-09-26T21:09:51.840Z
1muflon1
<p>Economists tend to disagree with price gouging legislation, because they agree with price gouging and posit that it ensures the most &quot;efficient&quot; distribution of resources during a crisis.</p>
<p>The rationale, which I do not understand or agree with, is that the higher prices will deter hoarding and make sure that the people who need something the most will get it, since those people are the ones who are willing to pay for it the most.</p>
<p>This makes very little sense to me, for the simple reason that a person who needs something may not be able to pay for it at all, and because <strong>price elasticity of demand goes down with income</strong>. High prices do not impact the behavior of rich people as much, since they can afford the higher prices and have no real incentive to tighten their belt at all. The more money you have, the more you waste, since you don't have the need to be frugal and efficient with how you use things.</p>
<p>When price gouging occurs, it only ensures that the people who can actually <strong>afford</strong> the higher price will be able to get it, since markets do not care about need, but about ability to pay.</p>
<p><em>The water example</em></p>
<p>Suppose there is a shortage of water, and as a result, the price of water is increased due to the supply crisis.</p>
<p>The people who are able to get their hands on the limited supply of water are the people who can afford the higher price, aka the rich. The rich, who can still afford water, will buy up the remaining limited supply in order to fill their swimming pools, irrigate their gardens, and generally use it in a wasteful manner.</p>
<p>So, a poor person who needs the scarce water more so that they can drink, bathe, and clean their house, will be outbid by the rich who will use that water up for frivolous purposes even though they don't really need it at all, as the poor, broke person may literally not have enough money left to pay for it.</p>
<p>The rich don't need all of that water. They want it, and can afford it, so they will gobble it up, even if that leaves no water for the rest of the population who genuinely require it more.</p>
<p>This can be illustrated with other examples as well, such as milk being bought up by the rich during shortage to make decadent deserts and feed their cats while the poor get none, or limited electric generators being sold to the rich who use it to power their yachts instead of a poor person who might need it to heat their home.</p>
<p>So it doesn't actually deter hoarding, since the rich will still hoard the limited resources for purposes they do not actually need it for, while the people who are priced out are going to suffer or die.</p>
<p>Economists describe this scenario as the rich being more &quot;willing&quot; to pay for the water than the poor and placing more &quot;value&quot; on it, but this completely makes no sense to be.</p>
<p>The poor literally <strong>cannot afford</strong> basic necessities when the prices are jacked up. They need those things, want them desperately to survive, but it is literally out of reach financially.</p>
<p>It seems dishonest and somewhat cruel to suggest that a poor person who dies because they couldn't afford basic necessities, for example medication and food, was just &quot;unwilling&quot; to pay a price they could not afford. It suggests that they chose to forfeit the good and die as a result, even though they did not have a (lawful) option.</p>

<elasticity><price><markets><price-control>
Why do economists deliberately conflate willingness and ability to pay in the context of price signals and price gouging?
anonymous_inquirer
# Why do economists deliberately conflate willingness and ability to pay in the context of price signals and price gouging?

(Asked by: username_0 on 2024-09-26)

Economists tend to disagree with price gouging legislation, because they agree with price gouging and posit that it ensures the most "efficient" distribution of resources during a crisis.

The rationale, which I do not understand or agree with, is that the higher prices will deter hoarding and make sure that the people who need something the most will get it, since those people are the ones who are willing to pay for it the most.

This makes very little sense to me, for the simple reason that a person who needs something may not be able to pay for it at all, and because **price elasticity of demand goes down with income**. High prices do not impact the behavior of rich people as much, since they can afford the higher prices and have no real incentive to tighten their belt at all. The more money you have, the more you waste, since you don't have the need to be frugal and efficient with how you use things.

When price gouging occurs, it only ensures that the people who can actually **afford** the higher price will be able to get it, since markets do not care about need, but about ability to pay.

*The water example*

Suppose there is a shortage of water, and as a result, the price of water is increased due to the supply crisis.

The people who are able to get their hands on the limited supply of water are the people who can afford the higher price, aka the rich. The rich, who can still afford water, will buy up the remaining limited supply in order to fill their swimming pools, irrigate their gardens, and generally use it in a wasteful manner.

So, a poor person who needs the scarce water more so that they can drink, bathe, and clean their house, will be outbid by the rich who will use that water up for frivolous purposes even though they don't really need it at all, as the poor, broke person may literally not have enough money left to pay for it.

The rich don't need all of that water. They want it, and can afford it, so they will gobble it up, even if that leaves no water for the rest of the population who genuinely require it more.

This can be illustrated with other examples as well, such as milk being bought up by the rich during shortage to make decadent deserts and feed their cats while the poor get none, or limited electric generators being sold to the rich who use it to power their yachts instead of a poor person who might need it to heat their home.

So it doesn't actually deter hoarding, since the rich will still hoard the limited resources for purposes they do not actually need it for, while the people who are priced out are going to suffer or die.

Economists describe this scenario as the rich being more "willing" to pay for the water than the poor and placing more "value" on it, but this completely makes no sense to be.

The poor literally **cannot afford** basic necessities when the prices are jacked up. They need those things, want them desperately to survive, but it is literally out of reach financially.

It seems dishonest and somewhat cruel to suggest that a poor person who dies because they couldn't afford basic necessities, for example medication and food, was just "unwilling" to pay a price they could not afford. It suggests that they chose to forfeit the good and die as a result, even though they did not have a (lawful) option.

**Tags:** elasticity, price, markets, price-control


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## 1 answers

### Answer by username_1 on 2024-09-26. Score: 3

> Why do economists deliberately conflate willingness and ability to pay in the context of price signals and price gouging?

They don’t.

Willingness to pay in economics is defined as maximum price someone is actually prepared to pay on market for certain quantity of x (e.g. see discussion in Mankiw Principles of Economics Ch 7), and is derived from people’s **constrained** choice. You seem to deliberately try to ignore it and manufacture some new terminology and distinctions that do not exist.

For example, if person's budget constraint is given by $m = px + qy$, where $m$ is the person's budget, so ability to pay/purchase goods and services, and utility is given by $u=x^{0.5}y^{0.5}$ then the agent's inverse demand function, which represents agent's **willingness to pay** for certain quantity of $x$ is $p=0.5m/x$.

So for example, if persons income is 100 dollars, at $x=10$ they are **willing to pay** 5 and so on. Hence, people’s budgets are already factored in. If someone is not able to afford water because their budget constraint is set to 0, then also their willingness to pay will be 0.

Saying they would be willing to pay more in counterfactual world, where their income is higher $m>0$, doesn’t invalidate the fact that in this world their budget is $m=0$, and hence when they are making a **constrained** choice they are only willing to pay 0.

Consequently willingness to pay depends on ability to pay. Ability to pay **is already factored in willingness to pay**. Hence, clearly mathematically poor person is actually willing to pay less for water or food, and so on. This is trivially true by definition. This doesn’t make person careless, this is again result of constrained choice.

So it is not dishonest to say that someone with low budget is not willing to pay exorbitant price for basic necessities. In fact it’s the opposite, it is dishonest to argue that they are willing to pay that, when clearly given their low income they cannot pay that and thus they are not willing to pay that as explained above.

Next, your question goes on some rant that that obscures the question so I will summarize it in;

> Does increasing price help to resolve shortages when there is income inequality?

Yes it does.

1. Continuing the previous example, using the demand function we derived;

$$ x= 0.5m/p$$

Suppose we have two people with same preferences but different incomes. A rich person with $m= 1000$ and poor person with income $m=100$.

Then let’s assume the original price of good $x$ which can be water if you want is 1 per unit. In that case the rich person will demand 500 units of water and poor person 50 units of water. So the overall consumption of water is 550 units.

Now let’s increase price of water 10x, now the rich person demands 50 units of water and poor person just 5 units of water.

The water is still conserved which helps to reduce the shortage. You might not like the distributional consequences, fair enough, but it is facetious to argue it doesn’t.t help to reduce shortages.

In addition, prices do not affect just demand side but also supply side. On supply side higher price incentivizes companies to produce more water.

2. Aside from the above theory, it is well established **empirically** that price hikes help resolve shortages (e.g. see Chakraborti & Roberts 2021). If anything it’s other way around the empirical evidence shows that the “anti-price gauging” regulation leads to more hoarding.

Reasoning based on false premises is not valid reasoning, and in your post you often just state something, without any reference to empirical evidence or accepted axioms. You also already seem to have pre-set conclusions and you are just trying to change preexisting and generally accepted economic terminology to fit your conclusions. That is also not valid reasoning.


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