In Praise of Price Gouging
As the northeastern United States continues to recover from Hurricane Sandy, we hear the usual outcry against individuals and companies who dare to charge market prices for goods such as gasoline. The normal market response of rising prices in the wake of a natural disaster and resulting supply disruptions is redefined as "price gouging." The government claims that price gouging is the charging of ruinous or exploitative prices for goods in short supply in the wake of a disaster and is a heinous crime But does this reflect economic reality, or merely political posturing to capitalize on raw emotions?
In the wake of Hurricane Sandy, the supply of gasoline was greatly disrupted. Many gas stations were unable to pump gas due to a lack of electricity, thus greatly reducing the supply. At the same time demand for gasoline spiked due to the widespread use of generators. Because gas stations were forbidden from raising their prices to meet the increased demand, miles-long lines developed and stations were forced to start limiting the amount of gasoline that individuals could purchase. New Jersey gas stations began to look like Soviet grocery stores.
Had gas stations been allowed to raise their prices to reflect the increased demand for gasoline, only those most in need of gasoline would have purchased gas, while everyone would have economized on their existing supply. But because prices remained lower than they should have been, no one sought to conserve gas. Low prices signaled that gas was in abundant supply, while reality was exactly the opposite, and only those fortunate enough to be at the front of gas lines were able to purchase gas before it sold out. Not surprisingly, a thriving black market developed, with gas offered for up to $20 per gallon.
With price controls in effect, supply shortages were exacerbated. If prices had been allowed to increase to market levels, the profit opportunity would have brought in new supplies from outside the region. As supplies increased, prices gradually would have decreased as supply and demand returned to equilibrium. But with price controls in effect, what company would want to deal with the hassle of shipping gas to a disaster-stricken area with downed power lines and flooded highways when the same profit could be made elsewhere? So instead of gas shipments flooding into the disaster zones, what little gas supply is left is rapidly sold and consumed.
Governments fail to understand that prices are not just random numbers. Prices perform an important role in providing information, coordinating supply and demand, and enabling economic calculation. When government interferes with the price mechanism, economic calamity ensues. Price controls on gasoline led to the infamous gas lines of the 1970s, yet politicians today repeat those same failed mistakes. Instituting price caps at a below-market price will always lead to shortages. No act of any legislature can reverse the laws of supply and demand.
History shows us that the quickest path to economic recovery is to abolish all price controls. If governments really want to aid recovery, they would abolish their "price-gouging" legislation and allow the free market to function.
Posted by Himagain on 11/14/12 10:24 PM
Bit surprised at that contrived example by the man who wrote THAT book in the 80's.
The problem is that humans- like the universe - need checks and balances.
We haven't come up with a decently working system yet, ( a benevolent dictatorship?) but certainly we need to look the need to be compassionate and accept the changes/lack of fortune that has someone born a black-black, ugly female in Lagos with poor health compared to a USofA well-born Baptist family of connection (where an absence of functioning brain is no handicap).
Posted by Joe on 11/14/12 05:39 AM
What price did the retailer get the gas? If the gas retailer were paying the supplier the same price as before and they were bumping up the price because they knew people were desperate as a result of Sandy then this is wrong.
Posted by PianoRacer on 11/13/12 04:39 PM
"Legislatures are as powerless to abrogate moral and economic laws as they are to abrogate physical laws. They cannot convert wrong into right nor divorce effect from cause, either by parliamentary majorities, or by unity of supporting public opinion. The penalties of such legislative folly will always be exacted by inexorable time." -- A. D. White
Posted by earnst on 11/13/12 01:35 PM
I agree with Dr. Paul. The torturing is more in Malcom's rhetorical questioning which could so easily be answered yet he leaves it alone. Prices are always affected by shortage regardless of the cause or in the event of fixing exacerbate the shortage. Simply the case here and suppliers should be expected to adjust accordingly.
Posted by Allen05 on 11/13/12 09:11 AM
While I generally agree with the concept of market prices, in this case the concept was tortured beyond recognition to fit it to the facts of this event. For a detailed explanation, see Click to view link.
Posted by dave jr on 11/12/12 11:20 PM
And without tight regulatory control of the industry, carriers might outfit to safely meter fuel, at the station, straight off the tanker for say an extra $0.20 per gallon. But who needs that compliance hassle?