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Monday, March 12, 2012

6. Price Gouging

The Concise Guide To Economics

by Jim Cox

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 anecessity 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 whatis, given the actual facts of the situation.

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