My opinions have changed greatly on the topic of “price gouging.” Like most people, my first emotional response is to recoil at the idea of charging $3,000 today, for an portable electric generator that sold for $999 a few weeks ago.
The more I learn about these situations, the more I’m convinced that my original thinking is what Dr. Thomas Sowell calls, “Stage One Thinking.” Dr. Sowell is famous for asking the question, “and then what happens?” In the case of the generators, the current situation practically guarantees shortages of fuel, generators, water, bread, etc. Here’s how.
As soon as a storm approaches, people with sufficient money, rush out to fill their tanks with fuel, and their homes with bread and milk. They buy generators, chain saws, and bottled water. With the anti-price gouging laws in place, there is no disincentive for people to buy more than they would normally use. This quickly results in shortages.
Think about this example.
Let’s say I have a warehouse full of generators in Oklahoma City, about 450 miles away from the Houston. I really want to help. I’d like to take five tractor trailers filled with generators to Houston to sell. I don’t normally sell generators in Houston, because local sellers with lower transportation costs sell their generators for less, making this business unprofitable for me.
I figure out TODAY’S break-even price for each generator. I’m not looking to gouge anyone, but I also don’t expect my employees to work for free and I know the folks at the fuel depot expect to be paid as well.
The price I come up with is well above the price that would be considered gouging. Since I can’t afford to ruin my business to help the folks in Houston, I stay home. I am sad for the folks inside the tragedy for two reasons. I know I have a warehouse filled with generators that people need, and I know that, as a result of well meaning price-gouging laws, people will be worse off because I can’t sell my generators to them.
I’ll ask this question again. How should our society allocate scarce resources that have alternative uses?
I’ve tacked a couple of links below to get the deep thinking started.
Economists don’t think price gouging is a problem. But what about our social values? (from Marketplace.org)
Charging flood victims $30 for a case of water or $10 for a gallon of gas doesn’t sit right.
And a majority of states, including Texas, have laws against price gouging. The state attorney general has threatened to prosecute people who jack up their prices in the wake of the flooding caused by Harvey. He said his office has received hundreds of reports of profiteering.
But most economists think those high prices can actually benefit communities during a crisis. Sky-high prices are the market at work, the basic laws of supply and demand in action.
“Price gouging laws stand in the way of the normal workings of competitive markets,” explained Michael Salinger, an economics professor at Boston University and former director of the Bureau of Economics at the Federal Trade Commission.
(read the full article)