To Gouge or Not to Gouge?

You are probably familiar with the term “price gouging.”  I’m talking today about price gouging in a specific market where demand for a good has suddenly skyrocketed. For instance, after a natural distaster demand for water, food, flashlights, etc…becomes very high. Wikipedia says, “Price gouging is a pejorative term referring to a situation in which a seller prices goods or commodities much higher than is considered reasonable or fair.” Now the obvious problem is, who decides what price is reasonable and fair? But there’s a more fundamental problem than that even.

Let’s take an example like New Orleans after Hurricane Katrina. Because water, food, and flashlights help people reach an end they desire, those products are in high demand. The desire to stay alive (the end would be to maintain life) is almost universal, so there is a universal demand for the products. Since the supply simply can’t provide for the demand. Prices go up. Often they go up astronomically, from $1 for a bottle of water to $10 or $20.

Some say that isn’t fair for a water distributor to sell water at $20 in New Orleans when you can drive perhaps an hour away and get it for $1. But think about the profit. It might cost $5 to sell water in New Orleans after Hurricane Katrina went through there. But you can sell it for $10 or $20. That’s a huge profit, unlike the usual maybe .75 cent profit in normal circumstances. If you are Water Distributor A (WD. A) and you see Water Distributor B in New Orleans making these outrageous profits, you will probably want to get in on it. So the supply of water in New Orleans has just doubled since you joined the market. Then there’s WD. C and WD. D, and well, you see where this is going. Because the profits are so high, there’s a huge incentive for others companies to also sell water in New Orleans. Eventually this increased supply will reach the demand and prices will be driven back to maybe $2 or $3. So who benefits from this price gouging? The consumers. If water could only be sold at $1 a bottle, there’d be much less incentive for other companies to come in and sell water. It would take longer for the supply to reach demand. The people of New Orleans would suffer.

So there’s the response to price gouging for those liberals who want to feel bad for the victims of disasters. Price gouging helps victims.

And here’s the libertarian argument. I’m going to create a little different scenario here. Let’s say that you are X and you are very forward-thinking. You realize that it is likely there will be some sort of disaster, social collapse, hyperinflation, whatever, and you want to prepare. You sacrifice present spending so you can stock up on water, canned food, all that sort of stuff. You also give up a really nice room in your basement to store all this stuff. And you wait. And you keep buying. And you wait. And you make your room bigger to hold it all. And you wait for disaster to strike. And eventually, it does. You’re one of 5 people in your whole town who has a storage room full of canned food. It doesn’t get bad until everyone else runs out of food in their fridges and pantries. That takes about 2 days. And then they come to you. And you say, “okay, I’ll sell you this can of carrots for $8.” And they say, “Isn’t that a little expensive?” And you point to the long line of people standing behind this person, “no, it isn’t too expensive. Look, I’ve got 500 cans of food and 5,000 people are waiting for it.” So they give over the $8 for the can of food, and so it goes. Look at it this way, there are only 3 possibilities if you are asking $8 for a tiny can of carrots.

1) No one will buy it. So then how will you profit?

2) You are forced to lower your price.

3) They buy it at $8.

The consumers are still in charge. Your price gouging is just the natural entrepreneurial response to this increased demand for canned food by consumers.

And then there’s the property rights issue. You sacrificed 5 years ago to have canned food today. You gave up valuable space in your basement. You dedicated time and work to preparing for a possible disaster. And the people around you bought big-screen TVs and Cheetos. It is your cans of food, don’t you have the right to try to sell it at whatever price you want? If consumers will buy it at your higher price, you can’t be “blamed” for that. I could try to sell a bottle of water today for $10, but no one will buy it. If I sold a bottle of water in New Orleans after Hurricane Katrina for $10, someone would buy it. Why would we think that the seller is somehow “evil” or “selfish” because the consumer wanted to buy it?

Just some thoughts on price gouging. 🙂

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