For North and South Carolinians, the new year brought forth new problems: the snowmageddon. The winter storm of 2018 covered the whole east coast including cities that do not see snow often. Folks in Charleston and Wilmington were in panic mode as they struggled to navigate the white, slippery roads. The beach bums were woefully underprepared. Every time a disaster like this strikes, the same old arguments arise. Of course, I’m talking about how to get goods to the people who need them the most. You might have seen it in headlines as price gouging.
The southern communities faced the daunting task of overcoming a lack of supplies. Because the people in Wilmington weren’t expecting five inches of snow, they didn’t stock up on food and snow shovels. The stores weren’t ready either, selling out of cold weather inventory immediately. One option is to increase the prices of snow equipment and food, derisively called price gouging. Other options include using charitable donations and government aid to provide highly demanded and essential goods to combat the storm (Usually these options warrant greater disasters than 5 inches of snow). What is the best way to distribute much needed goods like snow shovels and canned goods during the Carolinian Snowmaggedon?
Leonid Hurwicz brought us a better way to judge. It’s called “mechanism design theory.” He, along with Eric S. Maskin and Roger B. Myerson, won the Nobel Prize in Economics in 2007 for coming up with it.Mechanism design theory is the idea that we structure our incentives to properly match the objectives we hope to achieve. Though it sounds simple, it adds clarity to problems when properly applied.
For example, let’s look at the recent snowpocalypse. Hopefully, our objective is to get enough resources to those who need it the most. So , the goal is to find out whether the structure fits the objective. It’s hard to argue whether or not there will be enough resources with charitable donation, that depends on how optimistic you are about people’s giving. I’m pretty optimistic, so let’s say enough resources get there.
The next problem is if they reach the people who need them the most. It seems like charitable contributions end up distributed randomly at best. Most often it is first come first serve, which means whoever is closest to the distribution center and has the best transportation gets the resources.
Does this incentive system make sure people achieve the objective of getting resources to those who need it most? If I get there first, I get as many generators as I want, first come first serve. That means I can get a generator for powering my fridge to keep my beer cold when it’d be better used for a generator to keep the heat on in an old frail woman’s house. That doesn’t seem like it gets resources to where it’s needed best. But, they’re free. Figuring out that priority goes into the mechanism design theory.
Maybe the market is a better method of distribution. The increase of prices in the area brings more resources in. As it becomes more and more profitable to deliver generators to Wilmington from across the US, more people move to deliver generators to the area. This is good, but it still needs to distribute the goods to those who need it the most. Incentives, such as the expensiveness of the generator, make it less likely for me to want to chip in for money to keep my beer cold. Maybe I’ll decide to save money and just store my beers out in the snow. The frail old woman will probably find the warmth worth the extra cost though, at least more so than me keeping my beer in the fridge. Though, it’s unsettling to know that the cash-strapped folk whom are in dire need of a generator, can’t afford one.
At first glance, the inflammatory words, “price gouging”, sound horrible and inhumane. The idea of taking advantage of someone during the aftermath of a disaster seems abhorrent. However, thinking past the political tint that is given to the view of these markets, we can start to look at what our goals are and how well price gouging meets those goals with mechanism design theory. So next time there’s a cry of outrage over the market taking control of something normally done by the government or vice versa, try to keep good ol’ Hurwicz in mind. It might save you from a bitter Facebook argument.