Price Gouging. It Has Its Good Points

 by Rob Roper

Hurricanes Harvey and Irma have sparked a lot of discussion about the practice of “price gouging” – raising prices dramatically in the face of an emergency. Profiting off of others’ fear and tragedy. Needless to say, not much of the discussion has been positive about either the practice or its practitioners.

At the purely economic level, however, this represents a simple and natural supply and demand response: demand for bottled water goes up (and/or supply decreases) and the price for bottled water (or gasoline, or plywood, or whatever) goes up. So, how can that be a good thing, especially in an emergency situation?

First, high prices for things like water, etc. deter hoarding by the first folks to arrive at the store. If a case of water is $5, what the heck, get ten cases just to be safe (or to sell some later at a big profit)! But if a case is $50, maybe you just buy one, leaving water available for the nine people behind you in line. An artificially low price could actually cause a shortage at the worst possible time.

High prices also incentivize suppliers to meet demand. For example, Florida and Texas are going to want a lot of generators in the days to come. If one can sell a generator for twice as much in Houston or Naples as one can in Boise, that profit motive is a strong incentive to put a bunch of them in a truck and start heading south — fast. Some may say that’s greedy and opportunistic. Maybe, but more people will have electricity who otherwise wouldn’t. Which is the better outcome?

So, “price gouging”, or maybe we should say at this point “responding rationally to market forces” actually helps ensure a wider distribution of scarce goods as each individual is incentivized to purchase less, and helps to meet increased demand by attracting needed goods into the marketplace much more quickly. Both good outcomes.

That said, this is not a perfect solution, to be sure. People who have lost everything may not be able to afford $50 or even $5 for a case of water no matter what. And this is why charity should be at the top of all of our minds at this time. There is great demand for it, and no doubt we, our friends, and neighbors will meet the supply.

Rob Roper is president of the Ethan Allen Institute

{ 1 comment… read it below or add one }

George Angwin September 15, 2017 at 10:59 pm

Rob,

Us older folks will remember how interfering in the pricing mechanism by the Nixon and Carter administrations in the 70s caused shortages, especially of gasoline. Foolish actions by governments are bipartisan.

My reason for writing is to remind you that you don’t have to depend on theory and logic to understand how stupid controlling prices is. There are plenty of examples.

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