6.
Price Gouging
Price
gouging--charging higher prices under emergency conditions--evokes strong
emotional responses that are understandable but terribly wrong-headed.
In the words of
economist Walter Williams, "passionate issues require dispassionate analysis." The passion generated by price
increases for necessities in an emergency is just such a case. Three lines of analysis demonstrate
that "price gouging" is not only not offensive, but that preventing it would increase
misery, and that it is even a desirable practice!
Let's take for
example, the case of some hot item during an emergency, say plywood as in the
aftermath of a hurricane. Before
the hurricane, plywood was selling for the nationwide price of $8.00. After the hurricane prices of $50.00 or
more may not be uncommon.
The first line of
analysis should be the most meaningful for red, white and blue, freedom-loving
Americans. If one person (the
seller) has plywood and is willing to part with it for $50.00, it is because he
would prefer having the money to having the plywood. If another person (the buyer) has $50.00 and is willing to
part with the money for the plywood, it is because he would prefer the plywood
to the $50.00. No one is forced to
engage in this transaction, individual freedom is preserved in this voluntary
exchange, and it results in a mutual benefit. Can anything be less objectionable than a free exchange of
goods which results in a mutual benefit?
Secondly, a
successful effort to prevent price gouging would harm the very intended
beneficiaries in our example. With
thousands of needs, there is a vastly increased demand for plywood. At the same time the storm has
destroyed existing plywood (trapped under rubble, damaged, or lost) and made it
exceptionally difficult to transport additional supplies into the area.
Preventing increased
prices as a way of allocating the reduced supply with the increased demand
would result in a more severe shortage, and plywood going to uses that are less than the
most urgently needed ones. An
example: If one could sell a sheet
of plywood for a legal or socially-stigmated maximum of $8.00, he may well
decide to keep it for some relatively trivial use rather than part with it for
a use considered by the potential buyer to be of the most urgent
importance. At $50.00 the choice
is likely to be otherwise. Misery
is thereby increased by the implementation of measures to prevent price
gouging.
The point should also
be made that the price of a good is determined by the actual conditions of supply
and demand. The willingness and
ability of buyers and sellers to trade is what establishes any particular
price--before and after an emergency situation. In an emergency, the facts have obviously been changed. It is reactionary and a revolt against
reality to demand a never-changing price forevermore in the ever-changing world
we inhabit.
And last, the
desirable effect of successful "price gouging" would be in the higher
$50.00 price motivating sellers to increase the supply of plywood reaching the
citizens in need. The fact is, the
cost of sending goods into a disaster area is dramatically increased because of
the damage. Trucks now take longer
to reach their destination--time is money after all--the likelihood of driver
and rig being trapped within the affected area is another increased cost, and
the prospect of looters seizing merchants' goods has also increased. All of these and other factors have the
effect of discouraging shipments at the old $8.00 price; the supplier could do
just as well in any other area.
The increased price resulting from the misnamed price gouging should be
harnessed to encourage the needed supply--it is one bit of salvation disaster
victims can scarcely afford to do without.
None of this analysis
is intended to disparage the heroic efforts of charitable relief agencies, only
to pause to consider that in addition to the relief efforts, higher prices are
themselves a necessity to
assure an increased flow of goods in time of need. These higher prices are not a matter of what is fair or
unfair, regardless of anyone's initial gut reaction, but a matter of what is, given the actual facts of the situation.
-
Block, Walter
Defending the Undefendable,
(New York: Fleet Press Corporation, 1976)
pp. 192 - 202.
-
Brown, Susan, et. al.
The Incredible Bread Machine,
(San Diego, California: World Research Inc, 1974)
pp. 29 - 43.
-
Hazlitt, Henry
Economics in One Lesson,
(New Rochelle, New York: Arlington House, 1979)
pp. 103 - 109.
-
Rothbard, Murray N.
"Government and Hurricane Hugo: A Deadly Combination" in The Economics of Liberty edited by Llewellyn Rockwell,
(Auburn, Alabama: The Ludwig von Mises Institute, 1990)
pp. 136 - 140.
-
Rothbard, Murray N.
Power and Market: Government and the Economy,
(Auburn, Alabama: The Ludwig von Mises Institute, 1991)
pp. 19 - 26.
-
Sowell, Thomas
Pink and Brown People,
(Stanford, California: Hoover Institution Press, 1981)
pp. 72 - 74.
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