My heart goes out to New Yorkers and New Jerseyites (is it ites or ians?). Sandy has devasted communities – especially the Jersey Shore and Staten Island. One major focus of the media are reports of gas lines stretching miles and shortages of essential supplies. This is a gutsy time to explain why price gouging is good but it is also relevant.
Some of you are tempted right now to take the perfectly moral position that it is bad to take advantage of people in need- right? How could I possibly advocate for price gouging? Stick with me and keep an open mind.
Price is how a market allocates scarce resources. We have all learned about supply and demand, when demand is strong price goes up and usually supply increases allowing price to go down again and the cycle continues. These mechanisms don’t change in a crisis. The supply of gas is constrained after the storm and price should rise but it cannot because we have laws that won’t allow price gouging. So what happens? Since price hasn’t risen demand stays high and people cannot get the gas they need. Perhaps some of those people really need the gas more than others. If the price was allowed to rise people would ration gas. They wouldn’t buy it unless they really needed it- right? Those who really need the gas will pay the price and get the gas. In the system as is though consumers do not ration, or do not ration commensurate with the real supply. Now government comes in and arbitrarily rations by setting limits and/or days that consumers can get gas. This might seem fair but it ignores real need.
Think of price as a signal to producers, when price is allowed to go up producers will act to fill the demand. If flashlights or lanterns suddenly sell for twice the profit, you can bet that producers and shop keppers will work hard to get them into the hands of willing consumers.
Even progressives understand supply and demand and government gouging when it fits in their worldview. Progressives have called for higher taxes on oil and gas at every level of the market to rise costs and force people to ween off of fossil fuels. In Europe gas is taxed at huge levels and private car ownership punished with high taxes and tolls to discourage private cars.
This can be an emotional issue and sometimes logic and reason fail when something just seems wrong.
Perhaps an example from Katrina which has the perspective of time to separate some of the emotions from facts; will help.
From John Stossel (then at ABC News)
Mississippi Attorney General Jim Hood announced a crackdown on gougers after Hurricane Katrina.
John Shepperson was one of the “gougers” authorities 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 and make some money, too, so he bought 19 generators. He and his family then rented a U-Haul and drove 600 miles to an area of Mississippi that was left without power in the wake of the hurricane.
He offered to sell his generators for twice what he had paid for them, and people were eager to buy. Police confiscated his generators, though, and Shepperson was jailed for four days for price-gouging. His generators are still in police custody.
Before you say to yourself that is was wrong for Shepperson to “take advantage” of those poor people in need in the gulf coast- consider the facts. If Shepperson couldn’t make a big profit on the generators would he have gone to such lengths? Would he have driven all the way from Tennessee to Mississippi and invested all the money into buying the generators and renting the truck? Would he have risked his safety to go into an unstable region? Certainly not- and he had no guarantee of profits either so he was taking a risk. Also we don’t really know the nature of the deals he made. Maybe many of the people he sold to were wealthier than he, maybe his kids really needed that money. It doesn’t really matter but these kinds of distinctions help some people put morality and economics in perspective. Markets are blind to these things. Was he so wrong to see a need and fill it? Did any of us risk our necks to bring in generators? Surely some charitable people did, I interviewed some of them for my film of the re birth of New Orleans. Those people served a vital role- but history shows that people acting out of self interest are the main driver in the increase in prosperity in the world; not benevolence.
One more example, I frequently celebrate on the road when I get “free” wifi and don’t have to pay high fees at hotels. What I have noticed though is that when wifi is free it almost always sucks. Sometimes I cannot even work because the connection is overloaded and slow. I have learned that free wifi isn’t the blessing it appears at least most of the time. When hotels charge fees for wifi it tends to be much faster and better, people have an incentive to ration it and consumers on a pleasure trip will go without leaving it for business people such as myself who really need it. As an aside, nothing is really free- hotels or businesses decide whether or not they want to charge separately for this service. Wifi is paid for by all when it is free and by some on choice when it is not free. Either way the hotel has its’ cost and will certainly charge the customer or go out of business.
Should all businesses price gouge? Of course not- this week I received three emails from Kimpton, a boutique hotel chain I have stayed at in the past. They were offering discounts on rooms at their hotels in the NYC area. Surely they could have charged double, maybe triple and filled their rooms. I don’t doubt that Kimpton’s management made the decision in large part because they thought it was the right thing to do. However I also believe they saw it as a good opportunity to reward their past clients such as myself and inject some much needed good will. This good will may pay dividends as customers like myself will patronize them in the future. Other gougers will be punished by their customers in the future if they overreach, there are incentives either way in a complex market. When government makes a law they destroy the ability of the market to work and bring goods and services to the areas they are most needed. This hurts the very people the law is intended to help which is frequently the case with laws designed to protect.