As hurricane Dorien makes its way towards the East Coast, we’ve begun to see the regular preparations get underway. People boarding up their houses or evacuating, businesses shutting down early, 24-hour weather network coverage, and, of course, the prices of basic commodities rising. These price increases on things like water and fuel are most commonly called “price gouging” and are almost always viewed with distaste.
It’s easy to see why. In the middle of a major disaster or impending disaster the “evil capitalists” hike up all of their prices to milk the poor, suffering masses for all their worth knowing that people will pay if it means their survival. Price gouging practically gives a perfect example of all of the ills of capitalism that socialists and communists like to call out. The power struggle of the business owners against the distraught holding their “unfair” ownership of product over the heads of the little guys in their time of need. It’s a compelling story. Too bad that it is entirely a false one.
To start, there are already laws that exist to prevent price gouging from happening. Thirty-four separate states in the US have some form of preventative laws against the practice of price gouging. They include which items are considered necessities and, thus, are protected, and also list a maximum price for these goods.
An important aspect of these laws is that they ignore how pricing works. The price of goods and services are reached through the equilibrium of the supply and the demand (there are several other components to this calculation, but to elaborate further would be to stray too far from the point of this article) so by adding a ceiling to the price of these goods, it creates more potentially unfair situations than we would have without them.
Economics has best been defined as the study and management of limited resources in a society. When are resources more limited than in times of emergency? When the supply chain is cut but the demand remains equal or even begins to rise (as we see with bottled water and fuel during impending natural disasters) we need a mechanism to accommodate. This is where price gouging comes in. If, for example, a case of water goes up from $4 to $40 then, it follows, you will only buy what you absolutely need rather than over stock yourself. Even those with more wealth will be hesitant to pay such prices which, in turn, means that stock goes to those with the greater need, or demand, for the product than simply whoever has the cash to throw around. This is an economic concept known as allocative efficiency and is vital to the proper distribution of limited goods.
Thomas Sowell used the following example to argue against the price gouging legislation of Florida:
“Among the complaints in Florida is that hotels have raised their prices. One hotel whose rooms normally cost $40 a night now charged $109 a night and another hotel whose rooms likewise normally cost $40 a night now charged $160 a night.
Those who are long on indignation and short on economics may say that these hotels were now “charging all that the traffic will bear.” But they were probably charging all that the traffic would bear when such hotels were charging $40 a night.
The real question is: Why will the traffic bear more now? Obviously, because supply and demand have both changed. Since both homes and hotels have been damaged or destroyed by the hurricanes, there are now more people seeking more rooms from fewer hotels.
What if prices were frozen where they were before all this happened? Those who got to the hotel first would fill up the rooms and those who got there later would be out of luck — and perhaps out of doors or out of the community. At higher prices, a family that might have rented one room for the parents and another for the children will now double up in just one room because of the “exorbitant” prices. That leaves another room for someone else.
Someone whose home was damaged, but not destroyed, may decide to stay home and make do in less than ideal conditions, rather than pay the higher prices at the local hotel. That too will leave another room for someone whose home was damaged worse or destroyed.
In short, the new prices make as much economic sense under the new conditions as the old prices made under the old conditions. It is essentially the same story when stores are selling ice, plywood, gasoline, or other things for prices that reflect today’s supply and demand, rather than yesterday’s supply and demand. Price controls will not cause new supplies to be rushed in nearly as fast as higher prices will.”
In order to protect the well being and general functions of a community in times of need, markets need to adjust. To prevent simply the wealthiest person from taking more than they need, the pricing needs to change. Price gouging is the result of the market adjusting to fit the situation and is as important and necessary in the management of our limited resources as the market itself.