Misconceptions of Price Gouging

market forces

During natural disasters, resources that are normally cheap and abundant become low in supply and high in demand. In response, local businesses will raise the price of these goods, sometimes to levels as high as $99 per case of bottled water and $10 per gallon of gas, as well as hotel prices triple the usual. This rise in prices is negatively referred to as “price gouging.”

The typical case against price gouging is one of emotion that goes something like this: price gouging is an act of greed and selfishness by businesses exploiting those in their time of need. What kind of heartless monster would overcharge a needy family for necessities like food, water, and shelter?

Those that make this case forget what really matters during disasters. It may actually be the case that the rise in prices is due to excessive greed by horrible people, but all that matters is whether or not victims of a disaster are able to acquire basic necessities. The self-interest of business owners do not have to be at odds with the self-interest of disaster victims. So long as the latter get what they need, the motivations of businesses are irrelevant.

Those that argue in favor of price gouging (and, therefore, against laws that attempt to stop it) argue that price gouging is actually beneficial for those in need.

The case for price gouging relies on two concepts: subjective value and allocative efficiency. Subjective value refers to the fact that an object may be more valuable to some people than others. During a disaster, those that have a hundred bottles of clean water will value an additional bottle of water less than those that don’t have any. This means that when someone is buying water from a store, they will continue buying bottles of water until the price of water is higher than the value they receive from the next bottle of water. A system of prices encourages allocative efficiency, meaning that prices will guarantee that a resource will go to those that value it more than the price, and will not go to those that value it less than the price.

Let’s compare two scenarios. One scenario takes place in a state with laws that prevent price gouging, and the other in a state with price gouging during disasters.

In both scenarios, disaster victims are rushing to stores to buy bottles of water. In the state with prices the same as they always are despite a high demand, Person A (the first to arrive) will stock up on bottled water and buy as much as he can transport. Person B will likely do the same, as will Person C, until the supply runs out. Each of these people will likely buy more than enough water, considering the uncertain future and low price of water, and will not be as careful with conserving it. Person D, as well as every other person to show up to the store after the water sold out, will get nothing.

In the state that allows price gouging, Person A arrives at the store, sees the high price of water, and buys only what he believes he needs to get by, and nothing more. Person B will do the same, and so on. Since each person is buying only what they need, there will be enough water left over for Person D and many others. Price gouging works to direct resources to where they are needed most.

The scenarios are similar for other necessities like food and shelter. Without price gouging, people can afford to buy enough food to maintain their normal eating habits, leaving less food for others. Under a system where businesses raise prices, most people will only buy enough food to get by.

Destruction to homes and the danger of remaining in the path of a disaster influence people to find another place to stay, greatly lowering the supply of available housing within the area. When hotels engage in price gouging, families will only pay for as much space as they need, leaving other hotel rooms available for those that need them more. Other families will be deterred by the high cost, and choose to skip a hotel and ask to stay with friends and family, leaving hotel rooms available for those without that option.

High prices also encourage others through market forces to increase the supply. Those that wouldn’t volunteer to help during a disaster are encouraged by potential profit to transport abundant resources outside the disaster zone to where they are needed most.

Price increases can also send a signal to prepare. People that might normally be optimistic and underestimate the upcoming threat can be swayed by the early increase in prices, which will lead them to stock up on resources in fear of even higher prices in the future.

High prices act as an automatic rationing system during a disaster. People buy only what they need, leaving limited resources available to others that value them more. The intent of business owners is irrelevant. They may only be concerned for their own self-interest when they raise prices, but it’s also in the best interest of disaster victims for them to do so. Those that advocate against price gouging are only hurting those they are trying to help.

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Nathan A. Kreider is author of the Misconceptions column for Being Libertarian, and has written for the Austrian Economics Center, the Foundation for Economic Education, and the Liberalists. He also occasionally publishes a blog and video content, including short book reviews, which can be found on his website, nkreider.com. He can be contacted by email via [email protected]


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