Home > Opinion > OPINION: Why price gouging is a good thing

OPINION: Why price gouging is a good thing

By ThisIsReno

By Andy Matthews, NPRI President

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 about a Kentucky man who bought generators after Hurricane Katrina and took them to Mississippi to sell perfectly illustrates the folly of anti-gouging laws.

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.

NPRI is a nonprofit, nonpartisan think tank that seeks private solutions to public challenges facing Nevada, the West and the nation. An independent organization, the Institute neither seeks nor accepts government subsidies. It exists solely through the generous support of individuals, corporations, foundations and trusts.

%d bloggers like this: