[By Ben Noble]
In the wake of hurricane Harvey in Texas there has been an uproar over “price gouging.” By the time that this post is up hurricane Irma will have struck Florida. We all want the people affected by these storms to able to access the goods and services that they need to survive and recover. To this end, it is incredibly important that we remember that economics never takes a day off.
Price gouging is a good thing. If you’re not comfortable with that assessment then you could look at it as an inevitable reaction to a changing environment. Do we really expect everything, including prices, to remain stable in extreme situations? Here are three useful aspects of price gouging.
It prevents people from buying more than they need
One of the main criticisms of price gouging is that it harms the poor. After all, higher prices might prevent some people from buying the items they need. This is true to a point, but that isn’t the only thing it does. Higher prices also discourage people from buying more than they need. It disincentives hoarding. When people buy more than they need this obviously prevents other people from purchasing those goods.
This is very predictable under basic supply and demand theory. If demand for a product increases then the natural consequence is an increase in price. Any effort to artificially keep the price low will result in shortages. Higher prices are a signal to consumers that a good is highly valued and acts as a hurdle to prevent hoarding. Do sellers get more money? Yes, but those goods will be better distributed according to need.
It sends a signal to companies to send more goods to the area
Higher prices also signal suppliers to divert more goods to these areas. After all, if they can sell their goods for higher prices, then they make more money. When multiple suppliers do this simultaneously the area is flooded with new goods. This drives the prices back down to an extent since the law of supply and demand also states that prices fall when supply increases.
Profit often gets represented as a negative incentive. It is better to think of it as a tool that is used by sellers to determine where they should sell their goods. Tools can be used in both positive and negative ways. When influenced by competition and people’s ability to purchase goods the profit motive tends to generate the best possible outcome and distribute goods to the widest possible extent. Raising prices past what most people can afford will result in goods not being sold and profits not being realized.
It is self-enforcing
Finally, and perhaps most importantly, pricing gouging is more enforceable than price controls. Enacting price controls in an emergency environment would be difficult to enforce because there is obviously an emergency occurring or having just occurred. Priorities should be focused on saving lives and other activities. Would it be a good idea diverting efforts to chase down sellers that have raised their prices? What would stop sellers from taking their goods to the black market? This is a very common occurrence when economic activities that would take place naturally are outlawed. Then they become even more difficult to track down.
Price controls in an emergency situation would also require purchase limits per person. Like I stated earlier, artificially suppressed prices make it easier for people to hoard. Limiting purchases would be the natural step to combat shortages. Only this is another set voluntary economic interactions that would need to be monitored and prevented. It suffers from the same problems as price controls and it only adds to the manpower required to monitor the activities of sellers. Surely, that man power could be better used.
Price gouging is a natural result of changing economic realities. Using a negatively loaded term serves to cloud the waters. A better term for this would be emergency pricing. No effort is needed to allow emergency pricing to reflect the environment and supply and demand.
Emergency pricing is just. It, like pricing under normal circumstances, is based on property rights and voluntary interaction. Sellers own their goods and should be able to sell them for whatever they wish. Individuals should be free to make purchases from whomever they choose. You might not like it, but it is completely just. It just so happens that it’s also the best way to disincentive hoarding, distribute limited resources to those that need them, and signal suppliers from the surrounding area to send more goods to the area. You don’t even need to force others to participate. Economics never takes a day off.