Why price gouging is a good thing
Every week, NPRI President Andy Matthews writes a column for NPRI's week-in-review email. If you are not getting our emails, which contain our latest commentaries and news stories, you can sign up here to receive them. Just enter your email in the box on the top right.
For today's week-in-review column, Andy looks at how anti-price gouging laws harm the very people they're intended to help.
Why price gouging is a good thing
One unfortunate aspect of tragedies, like this week's Hurricane Sandy, is that wrong-headed government policies so often prolong the pain experienced by disaster victims.
Exhibit A are laws, like those in New York and New Jersey, prohibiting "price gouging" - defined as a merchant using the demand created by a natural disaster to charge more for items like gasoline, bottled water or generators.
Before the hurricane hit, New Jersey Gov. Chris Christie issued a stern warning against raising prices, stating, "The State Division of Consumer Affairs will look closely at any and all complaints about alleged price gouging. Anyone found to have violated the law will face significant penalties."
While this makes for good politics - with news stories portraying Gov. Christie as standing up for the "little guy" - it's terrible policy. Especially for the "little guy."
It should be noted that, in a free country, the government has no business telling private parties what they can or can't charge for an item.
But the problems with anti-"gouging" laws aren't just philosophical; they also hurt the very disaster victims they're supposed to protect.
Before Sandy hit, many stores in the storm's path ran out of food, bottled water and emergency supplies, and the customers who didn't get to the store earliest faced empty shelves. This makes sense. If the demand for bottled water skyrockets (as it does before a storm) and the price stays the same, stores will run out of bottled water quickly. That's because early-arriving customers will take more than they need to survive the storm, since there's no financial reason not to.
Now consider the unseen: the customers at the back of the line who aren't able to purchase any bottled water because it's all gone. There will be no news stories written about these folks. Yet they face real danger.
But what if the price of bottled water were to increase exponentially? You must remember that prices serve as a signal telling customers how scarce a product is compared to the demand for that product.
If a gallon of water went from $1 to $5 or even $10, customers at the front of the line would be forced to decide how much water they really needed to survive the storm, and would purchase accordingly. This would leave more resources for the customers at the back of the line.
Now in this case, the business owner would start making a large profit. And this is a very good thing. Just like high prices serve as a signal to consumers that a particular product is in great demand, profits signal to an entrepreneur that he or she can make money by providing more of that good or service.
So allowing high prices is the most efficient way to ration goods, and allowing high profits incentivizes others to provide more of those goods - which will eventually drive prices down.
The same is also true after a storm hits. This story from John Stossel perfectly illustrates the folly of anti-gouging laws.
After Hurricane Katrina, Mississippi Attorney General Jim Hood announced a crackdown on "gougers."
John Shepperson was one of the "gougers" arrested. Shepperson and his family live in Kentucky. They watched news reports about Katrina and learned that people desperately needed things.
Shepperson thought he could help, so he bought 19 generators. He and his family then rented a U-Haul and drove 600 miles to an area of Mississippi left without power.
He offered to sell his generators for twice what he had paid for them, and people were eager to buy. But police confiscated his generators, and jailed Shepperson for four days. The police kept his generators.
Did the public benefit? No.
Ideas have consequences. And anti-"gouging" laws have very bad consequences - for the very people these laws are intended to protect.
That's all for this week. Thanks for reading. Oh, and on a more pleasant note, I'm looking forward to seeing many of you at our 21st Anniversary Celebration tomorrow night featuring a keynote speech by Scott Rasmussen. I know many people are eager to hear from him just three days before Election Day, and those who attend are in for a real treat.
Until next time,
Andy Matthews
NPRI President
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