Somebody has to kill this myth. I’m going to attempt to contribute to that end today.
The myth to which I’m referring is that so-called “price-gouging” should be outlawed because doing so makes people better off. I care not to go into whether it is evil in “taking advantage” of people in need, though I feel like this would be a hard position to defend (since when are sellers not looking for the highest price at which they can sell?). The most basic reason is this: when two parties engage in a voluntary trade, both expect to benefit from it. Otherwise, they would not participate in the trade. This is even the case when people are seen as “price gouging.”
In this EconTalk podcast regarding the aftermath of a hurricane in North Carolina, Mike Munger of Duke University explains how the electricity went out and hence, his refrigerator was not operating. He had quite a value of food stored in it; without power, it would go bad. Many others were in the same situation and sought bags of ice to keep their food cool. The spike in demand caused the price of a bag of ice to increase to several times its normal price. This may seem like a bad thing, but it has the beneficial effect of increasing the likelihood that those who value the ice more will be the ones obtaining it (for example, someone who requires the ice for baby formula and values it more highly than someone who simply wants to chill his beer will be more likely to get the ice). Even though the price of ice is several times higher than usual, as long as it is lower than the cost of spoiled food, the purchaser will gain.
A higher price will also lead to more people supplying the good, which has the beneficial effect of increasing its supply, obviously, but also limiting the price increase. This is what happened with some guys from out of town. They decided to rent ice trucks and stock them with several bags of ice, hoping to sell it to those without electricity. That they did. Long lines formed and people grumbled about the higher price, yet revealed their willingness to pay it by purchasing the bags of ice. Both buyer and seller were made better off. However, somebody called the cops, who subsequently arrested the ice sellers for price gouging and commandeered their trucks (which they turned off, causing the ice to melt into water). Strangely, people cheered as these ice sellers were hauled off. Did this make them better off? Well, before they had the option to buy ice at a higher price or choose not to buy ice. Now they had no option to buy ice. Obviously, this doesn’t improve their situation, but can only make it worse.
And so it goes with price controls. Price ceilings have the effect of reducing supply; a low price is of no help if one cannot find anyone willing to sell it at such a price. This consideration doesn’t change in light of natural disasters.
What is disappointing is that heads of state show themselves to be ignorant of such economic reasoning. Governor Chris Christie of NJ has threatened to punish price gougers in light of Hurricane Sandy. Apparently he thinks it’s better to have nothing than to have the option of buying something you want at a higher price. Or he thinks sellers are perfectly willing and able to meet everyone’s demand in a time of crisis at normal prices. Either way, its a bad thing for sellers and buyers in New Jersey.
Anarcho-Buddy! 