“Price gouging” is a derogatory term for “unfair” prices on goods, typically in an emergency.The problem is that the perception of “unfairness” is totally arbitrary and stems from an ignorance of basic economics.Rather than create “fair” outcomes, “price gouging” regulations create the very problems they are supposed to solve.
What are prices?
A price is the value demanded by a seller in exchange for a good.The money paid for goods makes production of more goods possible.When the demand for a good suddenly goes up or the supply goes down, sellers raise prices to avoid a shortage.Higher prices cause consumers to limit their consumption.Higher profits pay for money to be invested in expanding production, and encourage other producers to redirect production from other uses to the goods most urgently demanded.
The disastrous effects of price controls during disasters
Consider what happens when politicians attempt to control a run on gas precipitated by an imminent hurricane:
When price controls are imposed, the market’s ability to respond to an emergency is paralyzed Rather than distributing gas to those who value it the most, products are distributed to those who buy it first. This encourages those with time to wait in endless lines, or the most panicky individuals to rush to fill up their cars at the first sign of trouble. Runs begun whenever a minority of people expects a rapid increases in demand, and the entire stock is quickly consumed by a few.
Whereas a free market would quickly respond to higher prices by shifting supply to the stricken area, outside sellers have no incentive to make an effort to bring additional supplies to the stricken area when prices are fixed. To recoup the higher costs of delivering gas in emergencies and offset the risk of a run, gas stations keep prices at a higher overall level for a longer time.
Price gouging saves lives
Absent price controls, gas stations raise prices in an emergency to a level where everyone who is willing to pay the new price is able to buy gas.Badly needed resources are delivered to those who need them most.Rather than buying out stocks, consumers ration usage of expensive goods.Those in the most vulnerable areas are able to pay a higher price for the gas they desperately need, while individuals who are less vulnerable wait until stocks are replenished.
Price gouging remedies shortages
In addition to distributing existing stocks more efficiently, high profits pay for the higher cost of delivering supplies to a dangerous area.They also encourage stocks in other locations to be redirected to where they are most needed.The market’s natural response to shortages is far superior to government planning of how much of everything is needed and where. This was aptly demonstrated after Hurricane Katrina, when FEMA paid truckers exorbitant amounts to ship thousands of tons of badly-needed ice around the country before finally throwing it out.
Price gouging is the best solution to price gouging
A rapid price increase in anticipation of an emergency reassures buyers that supplies will be available if necessary, resolving the problem of runs caused by false alarms. In the long run, a high price on gas during an emergency encourages consumers to be better prepared for emergencies and find alternate means of transportation and encourages and pays for suppliers to increase production.Rather than face dry pumps during emergencies, consumers in vulnerable regions will pay a slightly higher price for fuel stations and stores to maintain higher reserves.Ultimately, the market’s natural response to shortages dampens price increases and shortens waiting lines.