The Economics of Price Gouging

I’ve seen too many “libertarians” lately against price gouging, so let’s talk about the economics and ethics of price gouging.

As always tends to happen when there are major disasters such as Hurricane Harvey, prices of products shift to meet the situation. And, whenever that happens, you have people come out of the woodwork trying to shame and stop supposed price gougers. What makes this current situation unique for me is that I have seen an inordinate amount of “libertarians” saying price gouging is wrong and immoral. This tells me that we have way too many supposed libertarians who have no understanding of economics. Since I have seen this more than I would like, it stands to reason that some of my current listeners may also not understand the economics of prices and supposed price gouging. When I see a need, I try to fill it, so here we go!

Price gouging is moral

No matter what the Los Angeles Times may tell you, price gouging is not morally and ethically wrong. It is the exact opposite of that. The LA Times has the same concerns and lack of economic understanding as the average person. This has lead to anti-price gouging laws in 34 states, including Texas. This anti-capitalist mentality is not only bad economic policy that, ironically, can hurt citizens when resources are not efficiently allocated, but it is morally reprehensible. What fundamentally underlies these laws is the notion that consumers are entitled to certain goods and services and that the owners of the products being sold have a moral duty to make sure people get those goods and services. As you know, no one is entitled to goods or services from someone else, period.

Humans are generally self-interested creatures, regardless of how much many people would love to think that humans are more altruistic, that’s just not the case for the most part. If someone has the opportunity to sell a product, they want the highest profit they can get. If Joe has, say a hundred cases of water that he can sell, what makes more economic sense to Joe, to take those cases to Chicago today and sell them for $24 a case where there are thousands and thousands of cases just like it, or work a bit harder to get those cases to those in much greater need in Houston today and sell those cases for $100? I know which one I would do. And hell, at $100 a case, Joe is making plenty of profit that if he had a needy family or two come in needing water desperately but unable to afford it, he could give some away. Not all entrepreneurs would do that, of course, but many would.

And this is the point of the higher prices. It gives entrepreneurs the price signals and incentive they need to make it worthwhile for them to go out of their way and bring in much-needed equipment to disaster areas, even taking that equipment out of areas with a much lower need. Prices convey information, and in disasters, that information is priceless and can save lives. Someone in Boston can drink tap water today or wait a week for a backup generator or a chainsaw. Someone in Houston doesn’t have these luxuries because city water is not working and all of a sudden the need for generators and chainsaws has increased dramatically while the supply has stayed the same. The rise in prices in Houston would give Joe the incentive to load up his truck and head down there and get a much higher profit for his products. Keeping the information from prices flowing is vital to keeping important goods and services flowing where they are needed the most at any given time.

But, profit goes even further to help disaster relief. The ability to raise prices encourages businesses to stock excess reserves. For example, Wal-Mart actually hires a team of weather forecasters to predict extreme weather events, so they can ship extra goods to areas likely to be affected. Walmart does this to make a profit, but the end result is that they ensure critical supplies are available to the public when they’re most needed. I imagine they sent a lot of those sorts of supplies to the Houston area in advance of this disaster, not for fun or altruistic reasons, but to make money for their greedy, self-interested investors!

Benefits to raising prices

There are other benefits to increased prices when supplies are low as well. For example, without price increases, many people buy extra supplies “just in case”, regardless of what they have tucked away at home already. This puts even more pressure on supply by allowing unnecessary purchases, leaving those who have a higher need in the dark.

Allowing price gouging actually encourages citizens to be more prepared for disasters. Do you have enough food and water and other essentials stored at home for you and your family if disaster strikes your town? Or do you just assume you’ll be able to go to the store and buy what you need when something goes wrong? Knowing that prices might double, triple or more during a disaster is a pretty big incentive to go and stock up now instead of waiting.

But, isn’t it immoral to charge ridiculous prices for products just because demand is low? Won’t this disproportionately affect the poor? No more than the price of anything already disproportionately affects the poor. Does the price of a Tesla disproportionately affect the poor? Of course. Prices are neither moral or immoral. They are just indicators. Is it more moral to sell water at $24 a case so one person comes in and buys all of the stock at the low price, whether he really needs it or not, keeping it away from those who may really need it, or is it more moral to raise prices so that only people who really need that product purchase it? For example, if water were the normal price without being raised due to lack of supply, then what keeps someone from buying all the water to wash their dog’s ass instead of some water being able to be sold to people who have a higher need, like to keep from dying of thirst. Higher prices make it much less likely that someone would pay that kind of money to use water for less important uses than its highest use.

As Don Boudreaux said at FEE.org,

There’s no denying that people dislike the higher prices. What is deniable is that the higher prices are the problem. They are not the problem; they reflect the problem. Because the problem itself is unfortunate, its undistorted reflection will reveal this misfortune. But only by revealing this misfortune as accurately as possible to everyone who can help to minimize its effects will reality be returned as quickly as possible to normal.

Not raising prices according to the situation is much more immoral than raising the price to reflect reality every will be. Remember this the next time someone who has no understanding of economics tries to tell you that price gouging is immoral.

This article was originally an audio podcast on The LAVA Flow. You can listen to the audio below:

 

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