Posted on 08/17/2004 3:49:10 PM PDT by beaureguard
In the evening before Hurricane Charley hit central Florida, news anchors Bob Opsahl and Martie Salt of Orlando's Channel 9 complained that we "sure don't need" vendors to take advantage of the coming storm by raising their prices for urgently needed emergency supplies.
In the days since the hurricane hit, many other reporters and public officials have voiced similar sentiments. There are laws against raising prices during a natural disaster. It's called "price gouging." The state's attorney general has assured Floridians that he's going to crack down on such. There's even a hotline you can call if you notice a store charging a higher price for an urgently needed good than you paid before demand for the good suddenly went through the roof. The penalties are stiff: up to $25,000 per day for multiple violations.
But offering goods for sale is per se "taking advantage" of customers. Customers also "take advantage" of sellers. Both sides gain from the trade. In an unhampered market, the self-interest of vendors who supply urgently needed goods meshes beautifully with the self-interest of customers who urgently need these goods. In a market, we have price mechanisms to ensure that when there is any dramatic change in the supply of a good or the demand for a good, economic actors can respond accordingly, taking into account the new information and incentives. If that's rapacity, bring on the rapacity.
Prices are how scarce goods get allocated in markets in accordance with actual conditions. When demand increases, prices go up, all other things being equal. It's not immoral. If orange groves are frozen over (or devastated by Hurricane Charley), leading to fewer oranges going to market, the price of oranges on the market is going to go up as a result of the lower supply. And if demand for a good suddenly lapses or supply of that good suddenly expands, prices will go down. Should lower prices be illegal too?
In the same newscast, Salt and Opsahl reported that a local gas station had run out of gas and that the owner was hoping to receive more gas by midnight. Other central Florida stations have also run out of gas, especially in the days since the hurricane smacked our area. Power outages persist for many homes and businesses, and roads are blocked by trees, power lines, and chunks of roofs, so it is hard to obtain new supplies. Yet it's illegal for sellers of foodstuffs, water, ice and gas to respond to the shortages and difficulty of restocking by raising their prices.
If we expect customers to be able to get what they need in an emergency, when demand zooms vendors must be allowed and encouraged to increase their prices. Supplies are then more likely to be sustained, and the people who most urgently need a particular good will more likely be able to get it. That is especially important during an emergency. Price gouging saves lives.
What would happen if prices were allowed to go up in defiance of the government?
Well, let's consider ice. Before Charley hit, few in central Florida had stocked up on ice. It had looked like the storm was going to skirt our part of the state; on the day of landfall, however, it veered eastward, thwarting all the meteorological predictions. After Charley cut his swath through central Florida, hundreds of thousands of central Florida residents were unexpectedly deprived of electrical power and therefore of refrigeration. Hence the huge increase in demand for ice.
Let us postulate that a small Orlando drug store has ten bags of ice in stock that, prior to the storm, it had been selling for $4.39 a bag. Of this stock it could normally expect to sell one or two bags a day. In the wake of Hurricane Charley, however, ten local residents show up at the store over the course of a day to buy ice. Most want to buy more than one bag.
So what happens? If the price is kept at $4.39 a bag because the drugstore owner fears the wrath of State Attorney General Charlie Crist and the finger wagging of local news anchors, the first five people who want to buy ice might obtain the entire stock. The first person buys one bag, the second person buys four bags, the third buys two bags, the fourth buys two bags, and the fifth buys one bag. The last five people get no ice. Yet one or more of the last five applicants may need the ice more desperately than any of the first five.
But suppose the store owner is operating in an unhampered market. Realizing that many more people than usual will now demand ice, and also realizing that with supply lines temporarily severed it will be difficult or impossible to bring in new supplies of ice for at least several days, he resorts to the expedient of raising the price to, say, $15.39 a bag.
Now customers will act more economically with respect to the available supply. Now, the person who has $60 in his wallet, and who had been willing to pay $17 to buy four bags of ice, may be willing to pay for only one or two bags of ice (because he needs the balance of his ready cash for other immediate needs). Some of the persons seeking ice may decide that they have a large enough reserve of canned food in their homes that they don't need to worry about preserving the one pound of ground beef in their freezer. They may forgo the purchase of ice altogether, even if they can "afford" it in the sense that they have twenty-dollar bills in their wallets. Meanwhile, the stragglers who in the first scenario lacked any opportunity to purchase ice will now be able to.
Note that even if the drug store owner guesses wrong about what the price of his ice should be, under this scenario vendors throughout central Florida would all be competing to find the right price to meet demand and maximize their profits. Thus, if the tenth person who shows up at the drugstore desperately needs ice and barely misses his chance to buy ice at the drugstore in our example, he still has a much better chance to obtain ice down the street at some other place that has a small reserve of ice.
Indeed, under this second scenario—the market scenario—vendors are scrambling to make ice available and to advertise that availability by whatever means available to them given the lack of power. Vendors who would have stayed home until power were generally restored might now go to heroic lengths to keep their stores open and make their surviving stocks available to consumers.
The "problem" of "price gouging" will not be cured by imposing rationing along with price controls, either. Rationing of price-controlled ice would still maintain an artificially low price for ice, so the day after the storm hits there would still be no economic incentive for ice vendors to scramble to keep ice available given limited supplies that cannot be immediately replenished. And while it is true that rationing might prevent the person casually purchasing four bags of ice from obtaining all four of those bags (at least from one store with a particularly diligent clerk), the rationing would also prevent the person who desperately needs four bags of ice from getting it.
Nobody knows the local circumstances and needs of buyers and sellers better than individual buyers and sellers themselves. When allowed to respond to real demand and real supply, prices and profits communicate the information and incentives that people require to meet their needs economically given all the relevant circumstances. There is no substitute for the market. And we should not be surprised that command-and-control intervention in the market cannot duplicate what economic actors accomplish on their own if allowed to act in accordance with their own self-interest and knowledge of their own case.
But we know all this already. We know that people lined up for gas in very long lines during the 1970s because the whole country was being treated as if it had been hit by a hurricane that was never going to go away. We also know that as soon as the price controls on gas were lifted, the long lines disappeared, as if a switch had been thrown restoring power to the whole economy.
One item in very short supply among the finger-wagging newscasters and public officials here in central Florida is an understanding of elementary economics. Maybe FEMA can fly in a few crates of Henry Hazlitt's Economics in One Lesson and drop them on Bob and Martie and all the other newscasters and public officials. This could be followed up with a boatload of George Reisman's Capitalism: A Treatise on Economics, which offers a wonderfully cogent and extensive explanation of prices and the effects of interference with prices. Some vintage Mises and Hayek would also be nice. But at least the Hazlitt.
"Price gouging" is nothing more than charging what the market will bear. If that's immoral, then all market adjustment to changing circumstances is "immoral," and markets per se are immoral. But that is not the case. And I don't think a store owner who makes money by satisfying the urgent needs of his customers is immoral either. It is called making a living. And, in the wake of Hurricane Charley, surviving.
--- David M. Brown, a freelance writer and editor, is a resident of Orlando, Florida. dmb1000@juno.com. Comments can be posted on the blog.
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Exactly who did I call names????
I am not arguing the economic theory of W. Williams. I am arguing the morality of price gouging and taking advantage of someone in distress. I point out that super-capitalists (one who believes that capitalism in its purest form is the utopian society) and their adherent theories are amoral. Life to them is based on a computation of gain and loss and nothing else.
Anyway, you obviously haven't listened to walter e williams or read his work. Or maybe you just can't understand it. The underlying notion is NOT money, it is FREEDOM.
Of course I have listened to his stilted way of presenting his viewpoint. It's boring. He cannot talk about anything but economics which is inherently a boring subject.
He wants people to be able to decide that if there's a disaster and they want to sell supplies - and they have to go through the trouble of getting transportation, product, personnel, whatever - that they and the buyer be the sole determination of how much the supplies are sold for.
Once again, I am not arguing economics. I am pointing out the amorality in using capitalism to solve all of society's problems.
Apparently, you want the government to step in and say, no, you can't offer to sell something in high demand for a higher price.
Show me once where I said government should step in. I am actually hoping that Christ would somehow have a say in this matter.
But apparently you'd rather have people dehydrate and die than some person who is motivated by evil 'profit' come in and fill their needs after the $1 a gallon water was sold out.
I forgive you this insult.
"Everyone wants to talk about gouging but none dare discuss hording. The practice people call 'gouging', which in most cases is just the market reacting to an over abundance of demand, is the best defense against hording. It may sound brutal, but it works to combat extremes at both ends of the spectrum."
There is not much change in net demand before and after the crisis.
As an aggregate, the affected people needed the same amount of food, water, and shelter before the disaster as they did after, minus any casualties.
"Gouging" is the result of economic actors reacting to decimation of supply, not increased demand. Supply of water decreases because water plants are offline. Supply of food decreases. Supply of shelter decreases because homes are destroyed or rendered uninhabitable.
The only difference between "gougers" and "hoarders" is what they plan to do with their stockpile of scarce goods - personally consume them, or make a quick buck.
"Which is more 'compassionate' - a person forced to spend the night outside because someone used more rooms than they needed - or a family that paid more for a room and thus enabled another family to stay in the room that's now available?"
What about the family who had nothing left but $50? Is it compassionate that they should spend the night outside because market forces dictate a $100 per night rate to ensure the most even distribution of rooms?
"If you're using up gas at government-set regular prices just to post here while others have to go without for vital needs, then that's something that the people without gas would probably see as worse than any gouging they may encounter."
So, it's not ok for me to use my generator to post here if I'm paying government-set prices, but it would be fine if I paid "market price" for the gas? People who would take issue with me posting here under these circumstances would not care if I paid $1 or $100 per gallon for the gas. The only difference would be the expletive they used when referring to me - "rich ba$stard" instead of just plain old "ba$stard".
Bingo.
Silly economist who can't see the forest for the trees bump!
exactly. There are number of factors that go into the decision whether to make the effor to sell the water.
For the kumbaya crowd, consider the following:
Evil businessman owns a beverage company 500 miles away. He has 2000 gallons of water sitting in his warehouse.
He must take into account:
1. Cost he paid for the water initially.
2. Transportation costs to and from the location of disaster. Also costs while driving around the area.
3. Any costs of lodging overnight.
4. Labor costs of making a trip. If it's just him, he's skipping opportunities at home and has to have employees fill the gap. If it's employees, he likely has to pay overtime.
5. The risk that he could travel 1000 miles, pay his employees extra, and not sell any water, because someone has already filled that need.
Keep in mind mr. evil price-gouging business man likely has a mortgage and other expenses too - he can't afford to just give away something he was planning on selling unless he was doing rather well.
So he determines that he needs to sell the water for $4 a gallon to make a healthy profit. If push comes to shove, he can maybe sell it for $3 a gallon or so and break even.
Now the society of benevolent dictators and government officals get together. They decree that no one may sell water for more than $2 a gallon. Anything more would be gouging and just plain evil.
What does the kumbaya crowd think will happen? Will the businessman who has to meet payroll and pay invoices to suppliers on time drive 1000 miles to lose $1 a gallon on 2000 gallons worth of water? Or does he give them away and tell his creditors he was just doing the brotherly thing (and then lay off an employee or two to make up the loss)???
Or does he do what any sane business man would do- decide it wasn't worth his trouble and he can't afford to spend the time and effort to lose money and hurt his business and his employees?
And who benefits from this grand declaration that protects the innocent from gouging? It's not the suppliers. It's not the consumers who had to go without water because the red cross, phillip morris, and local supplies weren't enough because there was no incentive to fill the need.
The only people who benefit from this are the politicians and the kumbaya crowd who can bask in the glow of their own self righteousness and say "look at all the people we helped by eliminating price gouging" -- all while people are going without water and other things they need.
And that is what they claim for their superiority - their good intentions that can result in more suffering that they cure.
"So, it's not ok for me to use my generator to post here if I'm paying government-set prices, but it would be fine if I paid "market price" for the gas? People who would take issue with me posting here under these circumstances would not care if I paid $1 or $100 per gallon for the gas. The only difference would be the expletive they used when referring to me - "rich ba$stard" instead of just plain old "ba$stard". "
That's a moral question that you need to answer for yourself. The POV of a victim of 'gouging' is similar to that of a victim of 'hoarding' - they are both left without what they need / want because of another's actions. But with 'gouging', at least they have the ability to haggle. Once it's 'horded', they're SOL.
You use the example of a person who only has $50 for a hotel room being out of luck. If instead a hotel room, that person only had 3 gallons of gasoline due to government price controls, but needed 5 to get to a relative's house, they would be just as bad off as if if they were out of a hotel room because of price increases.
But this time, it would be because of government fiat. And by the actions of 'horders'.
Because if they had $50 and gas was $10 a gallon, they could afford enough to get where they had to go. But if gas were artificially rationed due to government limits, or due to 'hording', by say, people who couldn't stay away from free republic or "fear factor" or their PS2 - then they are much worse off than they would be if the free market was allowed to curb demand naturally.
They still can't get what they want or need, but this time, they have no recourse.
So few trust the market - astonishing!
Thanks for your patient efforts.
I've lost patience.
So many here say they want freedom. But when it comes down to it, many of them only want freedom for themselves. They're all for government intervention when it favors their current position.
"that person only had 3 gallons of gasoline due to government price controls, but needed 5 to get to a relative's house"
Or he could have only three gallons of gas because he didn't have enough cash on him when the storm hit to buy five at the "market price". Either way, he's screwed.
"But with 'gouging', at least they have the ability to haggle"
In the "price controlled" scenario, he could do like I did - ask neighbors, call out on the CB radio, and hike all over the county until he found somewhere to buy gas.
Talk about warped logic. The fact is just as many people can and will die by being priced out of the market as will be saved by price gouging. Your argument is not only totally irrational, it is morally inverted as well.
The truly sad part is that their reasoning has aligned them with the average DU poster, and they don't grasp that fact or just don't care.
If you look at my example at the end of post #98, two families have different needs but both could come up with $150 if they needed to. Need in that example is indeed equal to "willingness to pay". The difference in the families is only who has relatives nearby. You could think of that as one extreme, where all people have the same wealth, but different needs. The other extreme is that all have the same basic need, but extremely different ablity to pay. Neither extreme fits the real world. People have different ablity to pay, but there are also poor people with relatives nearby, and rich people with no relatives nearby, thus different needs than those with no relatives nearby.
Let me try an example that incorperates both wealth (your focus) and differing need (my focus).
Say we have 400 hotel rooms at $50, 400 wanted by rich families, half with relatives nearby, and 400 wanted by poor families, half with relatives nearby. That is 400 rooms but 800 demanded.
My solution: $150 price.
Result: Hotel rooms occupied by:
200 Rich with no nearby relatives
25 Rich with nearby relatives (hey, there rich)
175 Poor without nearby realtives
=400 rooms
Others:
175 Rich stay with nearby relatives
200 Poor stay with nearby relatives
25 Poor cannot afford $150, are on the street (or drive farther out)
=400 with no rooms, of which 25 poor are on the street (or have a long drive).
Your solution $50 per night
Hotel rooms first come first serve (say randomly):
200 Rich get hotel rooms, half with nearby relaives
200 Poor get hotel rooms, half with nearby relatives
=400 rooms
100 Rich Stay with nearby relatives
100 Rich on street (or drive farther out)
100 Poor stay with nearby relatives
100 Poor on street (or drive farther out)
=400 witout rooms of which 200 are with relatives and 200 are on street or must drive far.
So rich people can come out better in a disaster in general, and rich people come out worse in your solution. But poor people as a group are also worse off in your soulution, assuming 100 poor families on the street is worse than 25 poor families on the street. Of course, you can tweak the numbers if you like but the point remains. Rich and Poor alike, both groups, are worse off under your solution. Your solution of no price increase results in a lot more hardship. If you are woried about the poor busting thier budget then give them aid after the fact, but please don't put 175 additional poor people on the street in some sort of moral crusade against "greed".
You just made the point I made on another thread (different article same topic).
Censoring Pleas for Help [Government price controls during natural disasters hurt people]
No one is saying don't give away water, and other supplies to the truely poor, or sell on temporary credit (an infomal IOU, or give it free) to those who are not poor but are stuck without means of payment. Those things are Chirstian. I don't see what is so Christian about ignoring the impending shortage, selling at the old low price to the people happen to show up first, and then having nothing left for those who need it most, be they rich or poor.
And I'm here to tell you memories last lots longer than that. I lived in Des Moines during the big flood of 1993, when the entire city was without public water service for close to two weeks. The beer companies, God love 'em, got together and bottled-and-canned up a jillion gallons of drinking water for the inhabitants. For free.
As a young man of 20, I already had great affection for the products of Anheuser-Busch, but they earned my undying love for their actions those couple weeks. : )
SW
I've always thought it was to help preserve order in disaster zones, namely by protecting the safety of those who would gouge.
SW
True, though you should note that the 100 of the poor people who had noplace to go ended up being $100 poorer than they would have been under the $50 scenario; I don't wish to suggest that isn't more than offset by the fact that 75 poor people who needed rooms were able to get them when they otherwise wouldn't, but in fairness that should be noted.
As a general observation, if the market price for a good is $X/unit or less, that means anybody can buy as much as they want for $X/unit [with the caveat that buying too much of a good may cause the market price to increase before the purchase is ocmplete]. Conversely, if someone cannot buy a good for $X/unit, the market price is above $X.
The effect of price controls is to keep prices low until they skyrocket. Allowing prices to fluctuate freely helps avoid worse changes.
[BTW, on a related note, the effect of price floors is to make goods whose market price falls below the floor, worthless].
I operate a small grocery store in Virginia's Northern Neck. When Isabel came through here ... I raised not one price. My ice and water went in a matter of hours.
Suppose that, after you sold all supplies, someone came through with a supply they wanted to sell at a premium price. Would you have bought it so you could then have supplied your customers at a higher price? Should that be legal?
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