Why price-gouging is OK

Many people dislike the high prices that typically occur during crises like the recent hurricane in Texas. Some cities and states even make “price gouging” illegal.

Unfortunately, discussion of this topic tends to be long on moral indignation and short on economic understanding. Anti-price-gouging laws are generally popular, even with people who normally believe in the power of free markets.

But popular does not mean right. These laws are a mistake, as I will explain.

Prices are important

Let’s first lay a little groundwork regarding prices.

Prices play an extremely important role in the economy. High prices for certain items communicate that those items are currently scarce, or highly desired by consumers. Conversely, low prices communicate that certain items are plentiful, or unpopular with consumers.

Prices also cause buyers and sellers to change their behavior. For example, high prices for purple widgets encourage buyers to reduce consumption of purple widgets, while also encouraging sellers to somehow increase the supply of purple widgets.

Of course, global circumstances and consumer preferences are ever-changing, and prices also change to reflect the new reality.

None of this is unusual. It’s just the normal interaction of buyers, sellers, and prices in the economy. It leads to beneficial results for society. Those benefits are not suspended because of a hurricane.

What problems do crises cause?

Maybe it will help if we look at this topic from the viewpoint of the problem. That is, what problems do hurricanes cause for consumers when it comes to buying products and services?

The answer is that hurricanes cause shortages of desired items like water, food, generators, and plywood. Why? Because (a) hurricanes cause higher-than-normal demand for such things, (b) people buy greater quantities than they really need (hoarding), and (c) hurricanes can disrupt the usual supply chain into the crisis area.

Supply shortages are not trivial. My daughter who lives in Houston sent me photos of bizarrely empty store shelves. If you live in a crisis area and cannot obtain the supplies you need, shortages might be a matter of life and death, or at least serious discomfort.

What is the solution?

If shortages are the problem, what is the solution? It’s not complicated. Higher prices!

Higher prices in crisis areas do two great services. First, they encourage increased supply to the crisis area. Second, they discourage hoarding.

Increased supply: Whether we like it or not, most people are (a) motivated by profit and (b) prefer to avoid losing money. Higher prices in the crisis area allow sellers to either (a) make a higher-than-normal profit or (b) avoid losing money if the cost of supplying the crisis area spikes up. Either way, high prices encourage a greater supply of needed goods. Normal prices do not.

Hoarding: Whether we like it or not, some people will buy more supplies than needed at the time of crisis, just to be safe. Given scarce supplies, this means that someone else will go without, and by definition, they probably need it more and value it more than the hoarder. High prices discourage hoarding. Normal prices do not.

In short, “price gouging” helps ensure that everyone in a crisis area is better able to get the supplies they need. It helps prevent empty store shelves. More specifically, it better ensures that those most in need will be able to obtain supplies.

An illustration

waterSuppose a hurricane has caused hoarders and others to buy up all available bottled water. For everyone else, the store shelves are bare.

In steps profiteer Paul from 300 miles away, selling $10 bottles of water that normally sell for $1. For simplicity, assume we have just two consumers and Paul has only one bottle of water left.

Along comes Ashley. She already has thirty gallons of bottled water in her car. She sees the $10 price and decides not to buy because the price is too steep.

Then along comes Beatrice. She has had little water all day. She is grateful to buy the water even at $10 because she is parched.

The $10 price-gouging price allows Beatrice to buy the water because (a) it encouraged Paul to supply the water, and (b) it kept Ashley from buying it.

Now, imagine the same scenario, except an anti-price-gouging law forces Paul to sell water for the normal price of $1. In this case, Paul would probably not bother making the long drive to the crisis area because it’s not worth his time and effort. This would make the water unavailable to both Ashley and Beatrice.

Even if Paul does make the drive, the artificially low price still misallocates scarce resources. When hoarder Ashley sees the bottle of water for only $1, she may buy it just to be safe. Now when the thirsty Beatrice comes along, none is available for her.

Note that in both cases the anti-price-gouging law prevents Beatrice from buying the water, because the low price either discourages Paul from making the trip or encourages Ashley to buy. Yet we know the water is of much greater value to the parched Beatrice.

Don’t worry about consumers

No doubt many people dislike price-gouging because they feel compassion for people in crisis areas who are faced with high prices. But let’s not confuse two different things.

Yes, we should all feel compassion for those who have their lives or homes devastated by natural disasters. But no, we don’t need to feel the same compassion for consumers facing high prices.

This is not heartless. It’s support for Beatrice. She would much rather have water available for $10 than no water at all. If you were parched and desperate, you would too.

The solution, as it often does, lies in freedom. Allow charities the freedom to donate free water. Allow businesses the freedom to supply water at normal or elevated prices. Allow profiteering entrepreneurs the freedom to supply water at price-gouging prices. In other words, allow all suppliers the freedom to supply as much water as they can at whatever price they choose.

But also allow consumers the freedom to buy or not, as they choose. Beatrice can then choose from multiple options.

She can accept free water from a charity, if available. She can buy $1 water from a normal supplier, if available. If she can obtain water from one of these sources, good for her.

But if no other source is available, Beatrice can buy the $10 water. If she believes it is her best option given the circumstances.

If consumers are free to buy or walk away, how is it a bad thing to encourage greater supply to a crisis area that might need it? Let’s give Beatrice all possible options and then allow her to make her own choice.

Conclusion

Let’s recap. Reduced hoarding. Increased supply to the crisis area. Better availability of goods to those who value them most (Beatrice). It seems to me that the good of price-gouging far outweighs the bad.

The bottom line is that society is better off with price-gouging than without. Anti-price-gouging laws should be eradicated from the books.


I encourage you to enter comments or questions below. Two rules: 1) be reasonably polite, 2) address the issue and avoid personal attacks.

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