New Light On Price Gouging

No public-policy issue elicits more disagreement between non-economists and economists than so-called “anti-price-gouging” statutes.

When natural disasters strike, most people decry the resulting rise in the prices of bottled water, plywood, propane, and other staple goods. Attributing these price hikes to sellers’ evil motives, pundits and politicians demand the enforcement of “anti-price-gouging” regulations – regulations intended to prevent the price hikes.

Economists always respond both with reasoned justifications for the price hikes and with accurate predictions that “anti-price-gouging” regulations will worsen shortages, decrease product quality, and fuel corruption – with most of this unintended harm suffered by the very people the proponents of anti-price-gouging regulations intend to help.

Some of the very best of this economic analysis was produced when Hurricane Dorian was bearing down on the U.S. East Coast. For a sampling see these essays by economists Art Carden and Mark Perry. See also this excellent economic analysis by Boston Globe columnist Jeff Jacoby.

Yet there are aspects of so-called “price gouging” that, although not commonly highlighted by economists, deserve attention.

Buyers Are No Less a Cause of High Prices Than Are Sellers

Start with the popular myth that “price gouging” is a one-way harm inflicted by sellers on buyers. In fact, sellers charge unusually high prices only because – and only insofar as – those prices are willingly paid by buyers. However justified or unjustified those high prices might be, they reflect the self-interest (or “greed,” as it is misleadingly called) of buyers no less than they reflect the self-interest of sellers.

The buyer who pays $60 for a sheet of plywood that usually sells for $12 does as much to raise the price of plywood as does the seller who sells plywood at that high price. And so if modern-day witch hunters insist on persecuting those whose actions cause plywood prices to soar, they should fling at buyers’ fury no less fierce than is the fury that they fling at sellers. Yet seldom, if ever, do these witch hunters give evidence that they understand the role played by buyers in setting prices.

But the economics gets even deeper, for it’s not necessarily true that if no one was willing to pay unusually high prices for plywood that plywood would then sell at its usual price of $12. Because natural disasters not only destroy existing inventories but also obstruct supply lines, if no buyer is willing to pay more than $12 for a sheet of plywood the quantity of plywood supplied might well be zero.

That is, it’s a mistake to assume that if all buyers somehow resist paying prices higher than ‘normal’ – or (more realistically) if buyers are prevented by “anti-price-gouging” statutes from paying prices higher than ‘normal’ – that at least some units of the good will continue to be available at the ‘normal’ price. It’s quite possible that in the aftermath of a natural disaster no units at all of a good or service will be available for sale at its ‘normal’ price.

And certainly – as is pointed out by economists who comment on prohibitions on “price-gouging” – even if some units of the good or service do continue to be made available at pre-natural-disaster prices, fewer units will be available than buyers seek to purchase. This situation, which is a textbook economic shortage, gives artificial weight to social, family, and political connections as a means of securing, for those who possess these connections, favorable prospects of being among the fortunate few who manage actually to acquire some units of the good or service that is in short supply.

Nearly Everyone Is a ‘Price-Gouger’

The lazy insistence of looking only at the most superficial of economic phenomena that arise when natural disasters strike leads to yet another error – namely, wrongfully accusing those who relieve suffering of intensifying suffering.

Whenever I encounter reports of a devastating hurricane, earthquake, or other natural disaster, I sympathize with the victims. Yet while I often contribute some money to charities aimed at relieving this suffering, I never abandon my work and daily routine in order personally to bring supplies to disaster victims.

Perhaps I should feel guilty, but, if so, so too should nearly every other person on earth. Very few people actually travel to disaster areas to personally help victims. And while I don’t believe that the many of us who don’t so travel deserve condemnation, I’m sure that the relatively few people who do so travel to disaster areas deserve commendation.

Especially praiseworthy are generous souls who donate their time and money to make available – free of charge to victims – food, water, and other supplies. But while not as applause-worthy as are these generous souls, the many enterprising persons who are motivated by the prospect of personal profit to bring supplies to devastated areas are indeed deserving of our respect and certainly not deserving of the harsh criticism that typically is leveled at them.

Everyone who, like me, stays comfortably at home instead of personally bringing supplies to disaster areas effectively charges to victims of disasters prices much higher than are the prices charged by sellers who are observed on the scene to charge prices ‘gougingly’ high. Even at these ‘gougingly’ high prices, I exert no effort to bring supplies to the disaster victims. But at prices high enough, I would do so.

If, for example, someone in a disaster area offers me $10,000 for each gallon of bottled water that I bring to them, I’ll immediately drop what I’m doing, rent a large truck, stock it with bottled water, and drive through the night to cash in on this immense profit opportunity. But at the ‘gougingly’ high prices actually charged in disaster areas, I’m unwilling to exert the effort necessary to supply disaster victims with bottled water.

The actual, ‘gougingly’ high prices aren’t high enough to incite me to join in the relief effort. And of course what’s true for me is true for you and for every other person who does not personally exert any effort to bring supplies to disaster areas.

This fact means that if those persons who actually sell bottled water and other goods at ‘gougingly’ high prices deserve denunciation and perhaps even criminal punishment, then you, I, and almost everyone else – the multitudes of us who demand even higher prices to supply such goods – deserve denunciation and punishment much worse.

So-called “price gougers” actually increase the availability of needed goods and services in regions struck by natural disasters, an activity that causes prices in those regions to be lower than otherwise. In contrast, those of us who offer nothing for sale in disaster-ravaged regions – a large group that includes nearly everyone who self-righteously criticizes “price gougers” – cause, by our inaction, prices in those regions to be higher than otherwise. When we grasp this economic reality, the ethics of so-called “price-gouging” appears in a new and less harsh light.

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