By Rob Roper
Hurricanes Harvey and Irma have sparked a lot of discussion about the practice of “price gouging” — raising prices dramatically in the face of an emergency and profiting off of others’ fear and tragedy. Needless to say, not much of the discussion has been positive about either the practice or its practitioners.
At the purely economic level, however, this represents a simple and natural supply and demand response: demand for bottled water goes up (and/or supply decreases), and the price for bottled water (or gasoline, or plywood, or whatever) goes up. So, how can that be a good thing, especially in an emergency situation?
First, high prices for things like water, etc. deter hoarding by the first folks to arrive at the store. If a case of water is $5, what the heck, get 10 cases just to be safe (or to sell some later at a big profit)! But if a case is $50, maybe you just buy one, leaving water available for the nine people behind you in line. An artificially low price could actually cause a shortage at the worst possible time.
High prices also incentivize suppliers to meet demand. For example, Florida and Texas are going to want a lot of generators in the days to come. If one can sell a generator for twice as much in Houston or Naples as one can in Boise, that profit motive is a strong incentive to put a bunch of them in a truck and start heading south — fast. Some may say that’s greedy and opportunistic. Maybe, but more people will have electricity who otherwise wouldn’t. Which is the better outcome?
So, price gouging — or maybe we should say at this point “responding rationally to market forces” — actually helps ensure a wider distribution of scarce goods as each individual is incentivized to purchase less. Gouging helps to meet increased demand by attracting needed goods into the marketplace much more quickly. Both of these are good outcomes.
That said, this is not a perfect solution, to be sure. People who have lost everything may not be able to afford $50 or even $5 for a case of water no matter what. And this is why charity should be at the top of all of our minds at this time. There is great demand for it, and no doubt we, our friends, and neighbors will meet the supply.
Rob Roper is president of the Ethan Allen Institute. Reprinted with permission from the Ethan Allen Institute Blog.
6 thoughts on “Roper: Price gouging has its good points”
tell me why I should have to pay 15% more for gas because 1) there are hurricanes 1500 miles from VT.
and 2) there is no immediate shortage of gasoline in my state because of a pipeline or refinery closing?
The fact that speculators moved the prices up daily had no relevance to the actual daily supply in this state .
Mr. Roper is making an excellent point. This is economics 101…maybe Econ 501…and I hope True North readers consider it carefully.
Re: “The fact that speculators moved the prices up daily had no relevance to the actual daily supply in this state ”
It most surely did affect the actual daily supply of gasoline in Vermont.
Because the price here in VT increased, there was less demand here in VT, because folks like you aren’t willing to pay the higher cost. Because there is less demand here and more demand in FL and TX, gasoline dealers redirected their tanker trucks to where they can get the higher price. The only reason you didn’t notice the decrease in supply is because you didn’t have to buy as much gasoline at this time as you usually do – because your town wasn’t flooded and you weren’t willing to pay the higher price.
Conversely, all the gasoline you and others didn’t buy in VT was redistributed to where it was most needed. And that’s not only a good thing – it demonstrates how effective and efficient a true free market can be.
So when water is $50.00 per case due to an emergency, what’s wrong with picking up a few cases for $5.00 with the assistance of a loaded 45? You seem to make the case for that.
If you want to exchange your loaded 45 for a case of water you could buy for $50, come see me anytime. On the other hand, if you think using a loaded 45 to steal the water is a reasonable recourse to free market economics, here in VT at least, you should think twice. You just might run into someone else with a loaded 45. It’s called market equilibrium one way or the other.
I agree with your market equilibrium statement – price gougers would disappear and the market would stabilize due to fear of disappearing. Strange how the market works, isn’t it?
Not strange at all. And the price gougers, while profiting temporarily, may not ‘disappear’. But they will go bankrupt as ‘the market’ exposes their behavior in the form of ‘bad will’.
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