Skip to comments.Why price gouging is a good thing
Posted on 11/02/2012 12:06:38 PM PDT by NevadaPolicyResearchInstitute
One unfortunate aspect of tragedies, like this week's Hurricane Sandy, is that wrong-headed government policies so often prolong the pain experienced by disaster victims.
Exhibit A are laws, like those in New York and New Jersey, prohibiting "price gouging" defined as a merchant using the demand created by a natural disaster to charge more for items like gasoline, bottled water or generators.
Before the hurricane hit, New Jersey Gov. Chris Christie issued a stern warning against raising prices, stating, "The State Division of Consumer Affairs will look closely at any and all complaints about alleged price gouging. Anyone found to have violated the law will face significant penalties."
While this makes for good politics with news stories portraying Gov. Christie as standing up for the "little guy" it's terrible policy. Especially for the "little guy."
It should be noted that, in a free country, the government has no business telling private parties what they can or can't charge for an item.
But the problems with anti-"gouging" laws aren't just philosophical; they also hurt the very disaster victims they're supposed to protect.
Before Sandy hit, many stores in the storm's path ran out of food, bottled water and emergency supplies, and the customers who didn't get to the store earliest faced empty shelves. This makes sense. If the demand for bottled water skyrockets (as it does before a storm) and the price stays the same, stores will run out of bottled water quickly. That's because early-arriving customers will take more than they need to survive the storm, since there's no financial reason not to.
Now consider the unseen: the customers at the back of the line who aren't able to purchase any bottled water because it's all gone. There will be no news stories written about these folks. Yet they face real danger.
But what if the price of bottled water were to increase exponentially? You must remember that prices serve as a signal telling customers how scarce a product is compared to the demand for that product.
If a gallon of water went from $1 to $5 or even $10, customers at the front of the line would be forced to decide how much water they really needed to survive the storm, and would purchase accordingly. This would leave more resources for the customers at the back of the line.
Now in this case, the business owner would start making a large profit. And this is a very good thing. Just like high prices serve as a signal to consumers that a particular product is in great demand, profits signal to an entrepreneur that he or she can make money by providing more of that good or service.
So allowing high prices is the most efficient way to ration goods, and allowing high profits incentivizes others to provide more of those goods which will eventually drive prices down.
The same is also true after a storm hits. This story from John Stossel perfectly illustrates the folly of anti-gouging laws.
After Hurricane Katrina, Mississippi Attorney General Jim Hood announced a crackdown on "gougers."Ideas have consequences. And anti-"gouging" laws have very bad consequences for the very people these laws are intended to protect.
John Shepperson was one of the "gougers" arrested. Shepperson and his family live in Kentucky. They watched news reports about Katrina and learned that people desperately needed things.
Shepperson thought he could help, so he bought 19 generators. He and his family then rented a U-Haul and drove 600 miles to an area of Mississippi left without power.
He offered to sell his generators for twice what he had paid for them, and people were eager to buy. But police confiscated his generators, and jailed Shepperson for four days. The police kept his generators.
Did the public benefit? No.
make price gouging legal, sure, as long as you make beating merchants who price gouge legal as well
Only good I can see in it is you know who to avoid spending money at in the future. Payback is a b*tch.
“Gouging” is good because market prices are good. They tell us best how to ration scarce resources. If you don’t like them, change supply or demand. Rail against nature or God. But don’t penalize sellers, who are only telling us the way things are. And don’t control prices, which can only redistribute relative benefit and hurt.
How would anyone know how much they would need before this storm? In the south coast, where storms are common, people get to do this every year just about, so they would have some kind of an idea. This has never happened up there. If you went to the store on friday, how much water do you think you would need for this storm? If you used public transportation and lived on the 11th floor, how much water would you have bought?
During normal periods I would agree 100%. In events like this certain merchants have a monopoly and there is no other source.
When people can’t get certain things they die.
You’re just making excuses for being greedy.
So you’re saying having people not being able to buy water because the price has been increased is better than having people not being able to buy water because the store sold it all? Yeah, no good. Price gouging is the most distasteful form of profiting from a captive audience, because this audience is captive due to disaster, it’s punishing people for living in the wrong city in the wrong week.
This is one of those things some people simply cannot be convinced of, like the damage caused by minimum wage laws. The only result of anti-gouging laws are empty tanks.
“So youre saying having people not being able to buy water because the price has been increased is better than having people not being able to buy water because the store sold it all? “
“Playback is a b*itch”
Playback for what? Selling you something? Well, if you don’t wanna pay don’t buy. This is why it’s crazy to criminalize “gouging,” aside from the economic stupidity. Charging a higher price doesn’t harm anyone because exchange is voluntary.
Unless you think the items on their shelves are community property and they hold them in trust and are morally obliged not to bake a profit off them in times of disaster. That’s a moral system of some kind, I suppose, though I don’t recognize it nor really understand it. But then we come back to the economic side. If you think it’s wrong to profit off of misery and that refusing to sell at below market prices is somehow harming the buyer, just know that customers will take advantage if lower prices by not showing concern for the community in refusing to ration according to need.
It especially irks me that government ties after “gougers” and sits idly by watching looters. Lesson: violence works.
“Charging a higher price doesnt harm anyone because exchange is voluntary.”
Yep - it’s better than the alternate alternative (no product at all...)
I guess this just lets the price-gouging merchants off the hook for not having a conscience and caring about their neighbors.
It’s not a strawman at all. That’s what he’s saying. He’s saying with the prices up to gouge level people will buy less because they can’t afford to buy as much. I just pointed out that some of those not being able to afford as much will not be able to afford any. One way or the other somebody is not getting water, either because they were too slow or too poor. Pick your poison.
“During normal periods I would agree 100%”
But during disasters it’s all the more important.
“When people can’t get certain things they die”
Exactly. And what woukd prevent them from getting what they need to live? Below market prices, that’s what. I don’t know why people can’t see this. Sentiment blocks reason, I suppose.
“In events like this certain merchants have a monopoly and there is no other source”
People have various misconceptions concerning monopolies, but perhaps the biggest is the delusion that they can set prices completely arbitrarily. But they do still have to worry about demand, and they do still want to dispose of their remaining stock in the most profitable means possible. And in this situation as in others profit is your friend. It ensures that information about scarcity is broadcast, and it ensures yesterday’s prices do boot screw desperate customers put of sorely needed items.
The danger of monopoly is when it bars the entry of competition, which requires government collusion. Arguments have been made, also, to preempted what are known as “natural monopolies,” which has gifted us public utity companies and the like. A local monopoly on selling bottled water during a hurricane us a sort if natural monopoly. Would you prefer state-run hurricane convenience shops to preempt evil, greedy price gougers? Or should stores be confiscated by the national guard in times of trouble? If you think price fixing works I guess that’d work.
“You’re just making excuses for being greedy”
Am I? Is it greed that makes selling in a disaster extra profitable? Try hacking up prices under normal conditions and what happens? Customers run away. What’s different during a crisis? Demand is higher and future supply in doubt. Steve Jobs became a kabillionaire fulfilling demand for various electronic gizmos. How come that’s okay but not the corner grocery store to make money off more essential goods? And furthermore, to fulfill the much needed function of rationing goods so that those who need them most can get them (yes, by paying more, as if that’s evil)?
I should think the fact that they can make such a profit would be proof that their goods and services are needed. But I guess you want them suddenly to be a charity. Who needs the profit motive? It’s not as if it ever induced anyone to do needed things which they otherwise wouldn’t. And it’s not as if we should expect people to pay for their own survival. It’s not as if we’re responsible for ourselves or anything.
legitimate explanations, legitimate explanations
Price gouging is a non-issue for anyone with a brain. Front or back of the line for water the day before the storm...they are all to stupid to live. Why wouldn't these folks get their shiite together a WEEK before the storm? Why not a month? Why not a year?
I was unaffected by this storm. It made a nifty hairpin turn around Massachusetts. Yet even if it had not veered, I was not concerned. Generator? Check. 80 gallons of stabilized gasoline? Check. Huge number of gallons of fresh water? Check. Food, alternate lighting, alternate cooking solutions to last years? Check. G & A to protect it all? Check.
And people call Preppers crazy? Screw 'em.
Cold hearted and cynical? Check.
In a free society, with a free market,the price of good in limited supply in a free market always tends to be set high enough to level down the quantity of the good demanded - that is, the quantity of it that buyers are seeking to buy - to equality with the limited supply of it that exists.
Are you for freedom or not?
On the one hand, the gouger provides a service/good that might not otherwise be available.
On the other hand, the beauty of the free market - supply and demand - always wins out. The gouger may make a buck screwing his neighbors, but when he gets robbed - or worse - by a surly customer, his neighbors might be less inclined to help him out.
Not to mention the fact that businesses/individuals known for gouging will find themselves black-listed when the market returns to normal.
There is no free lunch. Either for the gouger - or his patrons.
One more thing; take the guy who sells his stock at the same price as before the “event” - even though supply has dropped and demand is up. He now becomes in essence, a “whole-saler”. His patrons will over-buy, then sell their surplus at a profit. Seem fair to him?
I have no idea why you phrase it that way, better for people not to be able to buy because of price or because of absence of supply. I thought the point was that greedy sellers are making obscene profits, in which case they must have set the price well enough. The real choice is between the shelves being g empty and having the choice to pay what you’d never pay under normal circumstances. But to answer your question, the former case is better because then more people, and the more desperate people, get more water.
“profiting from a captive audience”
It’s not as if the sellers of bottled water kidnapped people and locked them in a cellar. They are being held captive by God or Mother Nature, not the local convenience store. So long as they are being held captive it is to the collective benefit that supplies are rationed in the mist efficient and just manner, which is the free market.
“it’s punishing people for living in the wrong city in the wrong week”
No, it may be profiting off them being so situated. But God or Mother Nature or whatever is punishing them, not the guy who sells them water. Blame the storm.
This whole punishment line of reasoning I find distasteful. I can understand a heroin pusher being seen as punishing a junkie, but would you say a farmer is punishing the eating public by growing corn when corn futures are up? Or any enterprise punishing customers fulfilling a need when supply is lacking anywhere in the market? Probably not. It can’t be bad to take advantage of market conditions anytime because then we’d all be guilty all the time.
Oh, I see, it’s only evil if you do it in times of especially acute need. But I might remind you that the more desperate was the need the better a thing it is that the seller did. Possibly saving lives is nobler than satiating the munchies late on a Sarurday eve, or whatever is their usual sale. And why shouldn’t they profit from doing good? Because it should come out of the kindness of their heart? Why? Nevermind, let’s pretend there’s a reason. Okay, then goodbye profit motive.
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