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Price Gouging Is Not Evil
I watched a clip on the news yesterday concerning price gouging. The Attorney General of North Carolina was telling us how many reports of gouging they were receiving, what the penalties are, and how they are going to prosecute gougers. This shows a lack of understanding about the role of prices in determining the most efficient use of scarce resources.
If during a crisis, prices are allowed to rise, people won’t horde as much. They will only buy what they really need. If prices aren’t allowed to rise, there will be shortages. People that need gas won’t get it, while others will have filled every gas can they can find, “just in case.”
The same applies to hotel rooms. Let’s say I am evacuating my family from the coast, and I have the choice between renting a hotel room a few hours away from home or driving an extra four hours to stay with a relative. If rooms are cheap, I will get a room, maybe even two, so the kids can have their own beds. This means there are fewer rooms for people who don’t have alternatives. They will have to sleep in their car (which is still back at the coast, because… no gas). If rooms are expensive, I am more likely to stay with the relative, and more rooms will be available to those that lack alternatives.
The best way to ensure scarce resources are used the best way is by allowing prices to fluctuate.
For those of you who complain about someone is taking advantage of the situation for profit, I have two questions: (1) If I sell gas at $10/gallon, but have a sign out front that states, “We are raising prices, so we don’t run out of gas. All profits over last week’s prices will be donated to hurricane relief”, would you be ok with that? (2) If you are fleeing from a hurricane, which would you rather have, gas at $10/gallon, or no gas?
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This is one area where I’ve been persuaded over the years and changed my mind, to agree with your premise. I also now sympathize with the grocer in the movie Falling Down instead of Michael Douglas’ character. Those grocers risk a lot to go into those neighborhoods and must compensate for the extra security, etc. Is it better to have a local grocery with high prices or have to travel miles to get groceries?
Entirely concur. The case that convinced me was the prospects of truckloads of generators getting hauled into disaster zones. The big box stores will do what they can to pre-stock, and maybe a little more for PR purposes, but they aren’t going to make their shippers endanger their drivers after the fact. Which means very few generators delivered afterwards to fill any gaps, when roads are still unsafe. Enterprising people will take those risks if they can make a commensurate profit off of the effort and hazard.
Two things can be true at the same time.
Price gouging can not be evil.
And moral, caring people can find price gouging, at least certain extremely opportunistic variants, to be dishonorable and trashy.
I prefer to live in markets with moral, caring people so I’m glad the tension is present.
I find moralizing about price gouging to be dishonorable and trashy.
The only absolute is that there are no absolutes. That’s a lesson my first boss drummed into my head. :-)
There is a moral prohibition against taking advantage of others’ misery, as well there should be.
But as described so well in the OP, when the government tries to legislate morality, it creates much worse problems than it set out to address.
Okay, but I find theorizing that we all live in a CATO algorithm to be pointless. I prefer the tension between those seeking to profit within a chaotic, sometimes painful and tragic, circumstance and those who would prefer some Judeo Christian decency to modify our selfish natures when our fellow citizens are in dire conditions, from which I exclude the need to purchase Bushmills at 2am in a crime ridden neighborhood.
This tension is present in almost everyone at some point during a crisis, especially if one permits “price” to include forms of personal service.
I find moralizing about moralizing…well…nevermind.
As the great John Derbyshire once pointed out, there is no such thing as “price gouging”. There are only market clearing prices.
Unless, of course, you’re an economic illiterate or a politician (but I repeat myself).
The people that are immoral, or indecent, are not the store owners who raises prices, but those that consume more of a critical resource than they really need, in a time of crisis. Prices are away of dealing with that type of behavior.
Beat me to it. The price of something changes based on lots of factors. Including demand at the time.
As if one could know beforehand how much one will need. I agree that price gouging can be a natural and helpful way of moderating usage of scarce resources. But let’s not condemn people for expecting the worst in an unpredictable situation.
Furthermore, it does not go without saying that people in greater need can afford higher prices. Again, that doesn’t mean government should protect against price hikes or even get involved. But free markets are not magic fixes to every problem.
Free markets are the worst way to determine prices. Except all the other ways.
It’s more than that. If the price of plywood to repair damaged homes goes up, more plywood will get to the area. More construction companies will show up to do repairs, expecting higher profits. Price is just a way to allocate goods. Those with greater need and willing to pay higher than normal prices will be the first to recover.
The aversion to “price gouging” is due to a communal sense of fairness that is applicable to a small, homogeneous community. The larger and more heterogeneous the population is, the less it works or applies.
Simple example: A natural disaster that limits availability of potable water for a wide area. FEMA, Red Cross, etc., hop to and begin the effort to deliver fresh water to those afflicted.
Scenario one: “Price gouging” laws are in place and rigorously enforced. Everyone in the affected area has to wait until one of these organizations get water to their local area. If it takes days, because they’re out in the boonies, tough luck.
Scenario two: No price gouging laws, and a few dozen bubbas with pickups from the surrounding states run by Sam’s and load up with bottled water with the idea of both helping out the people with no water, and making some extra money for that bass boat they’ve been dreaming about.
Scenario two would get much more water to the affected area, more quickly. Some, maybe all, of the bubbas might find themselves unable to sell their water because FEMA beat them there. Or maybe they figure out that the outlying areas aren’t being quickly served by the big organizations, and can unload their H2O to those who need it and are willing to pay the premium.
If you’re primarily concerned with alleviating the water shortage as quickly as possible, not having gouging laws is the way to go. If you’re more concerned with outlawing things that seem morally icky, you’ll prefer scenario one.
Except these are not free markets. They are often chaotic human tragedies dominated by monopolies. At times, they are dominated by illegal monopolies.
That doesn’t mean entrepreneurial spirit against the odds and the elements might not be the best option in some cases.
Do I have a problem with the market clearing and optimizing effects of $15 gallon gasoline or $700 chainsaws (Homelite!) or $300 dollar motel rooms?
Not at all in many circumstances.
Do I have a problem with two entrepreneurs in a bass boat agreeing to rescue the three small children of a panicked homeowner from the last foot of dry roof in exchange for a transfer of the deed to the farm.
Yeah, I have a problem with that.
No problem with people having moral misgivings about whether certain market activities are fair in a drastic life threatening circumstance, or with subjecting even our market actions to Judeo-Christian evaluation in such extremities.
I feel some people are arguing for a libertarian Camazotz they would never want to live in.
I’d also have a problem with anyone demanding a deed to the farm in order to rescue someone’s kids. However, I would expect such a verbal agreement would be unenforceable due to being made under duress, or something. You could argue that later reneging on the deal once you’ve reached safety is also dishonest, but I’d say that’s sauce for the gander, in this situation.
We’re not talking about whether something is moral or ethical, but whether it should be illegal. There’s a difference, or should be.
Maybe there’s room for some broad stroke legislation (say, limiting profit to 500% or something), but my inclination is to distrust any such attempt, as political pressure to eventually reduce the limit to 0% would be huge.
Going on memory and forgot where I saw this. Maybe someone can cite the source.
It was posted on Ricochet at some point.
This is something I’ve noticed among people opposed to things like price gouging. They often believe that the choice is between normal prices and high prices, when it’s usually between high prices and no product.
I witnessed a debate between two friends about so-called Asian “sweat shops”. The leftist could not accept that the only options on the table were between working for $5/day in the sweat shop, or working for less pay doing something else, or not having a job at all. She seemed to think that if Americans stop buying stuff made in sweat shops, the workers’ situation would be improved somehow, but she couldn’t explain how. She finally just started repeating, “It’s about COMPASSION!” over and over.
This is the same sort of emoting that I often hear about price gouging.
I’m going to high-jack this to complain about a semi-related hobby horse of mine.
During the run-up to hurricane Rita, Texas state law enforcement rigidly enforced the rule that people evacuating north from the Houston area had to stay on the posted evacuation route. Anyone attempting to exit I-45 had to show that they lived in the area. This resulted in the Interstate becoming a parking lot. Accidents shut things down, then people started running out of gas because they’d been idling their cars for the A/C, which locked it up tight.
Remember, this was a month or so after Katrina, so a lot more people evacuated than might normally have.
Had Rita veered west north of Houston, many of these people would have been trapped in the path of the storm with nowhere to go.
There are scores of state highways and farm-to-market roads heading north through central Texas. When the main arteries got clogged, they should have allowed traffic to utilize all those side roads. But no! They had a plan, and they were sticking to it! Not because it was a good plan, but because bureaucrats don’t get fired for following the plan, regardless of how idiotic, but might get fired for deviating from it, even when it makes sense to.
Statism kills.
A few years ago a sincere high school girl at our then-church got on the Asian “sweat shops” bandwagon. I wanted to ask her what the people were doing before they began working in the “sweat shops” and that they’d probably return to if the “sweat shops” were closed. But, given the general political leanings in the church, I lost the nerve to ask, so she went on in her belief that the choice was between “sweat shop” and “ideal working conditions,” rather than “sweat shop” or near-starvation on a subsistence farm.
We don’t have that choice, so we opt for freedom, it always works out for the best for the most, while the alternative always harms lots of people and never solves problems. Forget the unctuous righteousness, it encourages the really “opportunistic variants who are dishonorable and trashy”, political demagogues. They know better but truth doesn’t always work out for them in the short term.
It’s one thing for a friend to think that way. It’s another for legislators who pass anti-gouging laws and a state’s AG to enforce it. They are supposed to have given it a little more thought.
Price gouging is illegal where I live and many don’t have the money to get out to a hotel, let alone pay $10 for gas or other elevated costs when an emergency is on the doorstep – it’s despicable.
One of these scenarios is extortion, not a pricing scenario.
I’m in Asheboro, North Carolina, at a staging site for hurricane recovery (I’ve been deployed here since yesterday).
The net effect of scarcity is for prices to rise. That’s as normal as markets get. What may appear to be victimizing those in need is the price signaling that there’s a screaming shortage.
I saw people checking into our hotel late last night (after my 20-hour shift wrapped up and I got 4 hours of sleep before today’s 20-hour shift). That there’s a scarcity doesn’t make people bad. In fact, it’s quite the opposite. I’ve had examples from the crew around me offering to sleep in their trucks in order to give their room away to people who did not have one.
The marginal revenue gained from a true gouge during a shortage will never outweigh the bad publicity for that individual business or location, or brand name. Never. What will never get the same kind of shame are the people who hoard materials that they couldn’t possibly hope to consume if half the planet got Thanos’d and no one was left to raise crops.
What we have here is a call for the fabled Walrasian auctioneer. He can sort this out instantaneously, otherwise there is just a lost of trial and error in finding the equilibrium solution.
We’ve had two gasoline shortages in Nashville in the last 10 years. Both were driven by panic buying based on news of hiccups in the supply chain. In a city/state where vendors can’t raise prices “to gouge” it only takes a few hours in the afternoon for those topping off tanks to empty all the gas stations for miles. People who really are empty can’t get home to the suburbs, thousands spend hours waiting in line to get what gas is left in the few stations that still have supply. Mind you, there were no weather events, no other natural disaster. In the first case a pipeline exploded in another state which brought news of a possible interruption but in reality no significant change in the availability of fuel supplied by fuel trucks. There just isn’t enough capacity in the delivery system to meet the demand of panic buying when the information that prices should communicate is controlled by politicians and the democratic (intentionally small d – both Rs and Ds participate) mob with caveman economic reasoning.
The last time – about 2 years ago – I was golden in the F250. Diesel can’t be overwhelmed by the majority gas-burners. However I was still stuck waiting in line for a girlfriend. Pro tip: Sam’s Club was the way to go. Membership requirement helped keep them in supply longer. Costco would probably work as well.
If gas is $10 a gallon, then You have 3 choices:
Anybody Who reads Dr. Walter Williams move to the head of the class:
Brilliant quote. Walter Williams is fantastic at explaining economic phenomena.