Price Gouging During Emergencies
a Good Thing?
During hurricane Katrina there were instances of prices being
raised, as there are during most natural disasters and emergencies.
Of course, people hate the idea of stores "taking advantage"
of them during these events, so politicians threaten to prosecute
store owners accused of price gouging to win public praise and
perhaps re-election. However, is it really such a bad thing to
raise prices during a disaster?
What is gouging anyhow? One definition is, "pricing above
the market price when no alternative retailer is available."
In the context of a natural disaster people don't care if there
are other retailers, especially if they all raise the
prices of things. Furthermore, just raising the price of something
during these times is considered gouging.
Now, some of us think that in a free country people should
be allowed to name any price they want for THEIR things (would
you like it if the government made you lower the price on your
home, car or labor when you sold them?). But setting aside that
argument, there is another reason we should let the markets work
- even during a disaster. It is that prices serve an important
function.
Why Price Gouging Serves Us Well
Let's look at a plywood retailer during a hurricane as an
example of why prices need to rise.
We can probably agree that a retailer doesn't want to hurt
people, but just wants to make more profit. We can also understand
that raising the price accomplishes this profit goal only if
the retailer can still sell his goods. For example, he won't
make anything on his high-priced plywood if it's priced so high
that nobody wants it, so he still has to price it to move.
When a hurricane is coming, all the plywood will still be
sold, but for more. It isn't really "above the market"
however, because markets change, and the "market price"
is naturally higher when demand increases, as it does before
a storm. But all that plywood will still be sold in any case,
and will be covering windows and protecting houses somewhere.
What the higher price does, though, is more than just put
more money in the retailer's account. It does something else
that benefits us all. Higher prices allocate the plywood to better
uses.
Let's start at $18 per sheet of plywood to understand this.
A man buys enough plywood to cover not only the windows of his
house, but the windows on his shed. He even buys too much, "just
in case" and has three pieces left laying in his basement.
Across town, some poor family is waiting for the hurricane with
their front window uncovered. They couldn't buy any plywood because
it sold so fast at this "normal" price.
What if the retailer raises the price to $60 per sheet? That
man, and everyone else, thinks more carefully about how much
to buy. People purchase only enough for the more important uses,
which means more front windows protected and fewer pieces sitting
in basements. Joe might have bought ten sheets of plywood, but
now gets just six, leaving four more in the store for someone
else.
That's not the end of this story, though. When prices rise
during emergencies, it motivates companies to be better prepared
to serve the community. The higher prices, if they are not discouraged
by politicians and prosecutors, mean more supplies are brought
to the areas where they are needed - because this makes more
money for the retailers.
Wal-Mart doesn't advertise it, but they monitor weather and
stock their stores accordingly. For example, they might bring
in an extra thousand snow shovels before a predicted blizzard.
It's a wonderful service for the community, so why do they hesitate
to let it be known that they do this? Because people are uneasy
with companies making a profit from their adversity.
It is a shame so many people feel this way. We don't think
it is wrong for a doctor to profit from helping us during our
illnesses and injuries. Those who serve should profit. Now, I
wouldn't like paying $60 for plywood, but I like the idea of
it being available, and if that's the price that makes it available,
that's what we need. It's better than punishing the retailer
just so whoever runs to the store the fastest can cover his shed
windows and leave unused plywood in his basement at the "fair"
price of $18.
Rising prices automatically allocate supplies to their highest
economic uses, so these prices (in the example above) result
in less damage to homes and businesses. At $60, more people will
use that plywood to cover expensive windows rather than sheds
and doghouses. The result is fewer and smaller insurance claims,
which in turn means lower future rates for all.
This is all something economists know, and it applies to most
things. When we let prices rise things are allocated to better
uses. Of course politicians and others are often ignorant about
economic issues, or just afraid to be honest. Many who understand
the issue probably believe that the public can't be educated
to see that what we refer to as gouging can make us all better
off.
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