Price Gouging Saves Lives

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.

Suppose the dying person doesn't have $25 for that life-saving drink of water. The water seller can refuse to sell him the water at a lesser price. The question is, should the water seller refuse, and thereby let him die?

Your comment sets forth the essence of a socialist system.

Supplies are then more likely to be sustained,

In DC last year when the Hurricane hit, prices went up on a lot of things in demand. This paid the cost of redirecting supply from other parts of the country.

Markets work.

Yes, we limited quantities, while they lasted.

Post #157 addressed the hoarding issue. Didn't happen here.

I was in no better position to restock or resupply because, as I said, nothing was getting in or out.

In fact, I was probably one of the last to get restocked. I was still on my normal schedule. No supplier goes out of their way for the small merchant.

The Food Lions of the world however, with the physical and financial resources to "darken the sky with airplanes", were the first ones fully back on line.

But, theoretically, yes I would have been in a better position.

"Sorry, but the merchant I am going to respect is the one who was able to supply the community when things got rough. The man who sells out his stocks in five minutes and shuts down the store when he it is needed most is no good to me."

Not according to the only one on this forum who actually happened to be a merchant during a hurricane disaster.
Ask him if he's a pinhead.

This thread makes me realize two things:

1) If a liberal is a conservative who has never been mugged, then these "capitalists" are victims who have yet to have their disaster visted upon them. It is clear they have no concept of the realities imposed by an actual long term emergency. And,

2) They are also the people I'd least like to have as neighbors when the world turns upside down.

I've been involved in disaster relief on both the civilian and military side for over twenty years. It's people like you, CTOCS, who always gave faith me in my fellow man. God bless you. (OTOH, some of the undercurrents to what I've heard make me realize that happiness is giving the order to distribute live ammunition.)

Charity and heroics are fine but but do you think you should be required by law to risk your life or your business to help others?

Absolutely not.

Here's the irony of the whole situation we're discussing here . . .

Let's suppose the "base" price for bottled water is $2 per gallon, and after a natural disaster there would be a move by merchants to raise the price to $10. If they are prohibited from raising the price (due to anti-gouging laws), they are going to keep selling their water at $2 per gallon. And they are going to run out of water very quickly.

To make up for this shortage of water, large-scale relief efforts are undertaken by government agencies as well as private charities. The "demand" for water will eventually be met through these efforts.

If you were to look at these relief efforts in detail and calculate the cost of delivering fresh water to the people living in the disaster area, I can guarantee you that the cost will exceed the $10 per gallon that the merchants weren't permitted to charge.

"I could have raised prices but would be paying for it today. As it is, people still comment on the fact that I was available and didn't try to take advantage of their grief. They even talked about me on one of the local radio stations that was up on a genset.

Had I, I would have far fewer customers today.

I understand the laws of supply and demand perfectly but profiting on the backs of my own neighbors during a time of universal suffering is not my idea of how to run a business or be a responsible member of a small community. I have to live here when the weather is nice too.
"

Bingo!

Dianna,

In your two posts that I've read on this thread you are demonstrating entirely too much common sense and good judgement.

From now on, to make things fair for other posters, you have to consume at least a six pack of beer, smoke some crack, or type blindfolded.

;-)

Thanks for your reply.

I'm looking at this thread and I am seeing the visceral reactions from both sides. It reminds me of the 'if you're a libertarian, you're a druggie' threads.

It's not that all or any libertarians are using or advocating drug use. They just don't believe that the government has the appropriate authority to ban drugs or to make them illegal.

What's happening here is the natural (at least at one time) gut reaction to the government interfering in the conduct of the free market. Some will raise prices much higher to 'profiteer', but most others will not. Some will even donate to those who need the supplies. It's just that we don't like the government butting in and mandating to us.

"If a liberal is a conservative who has never been mugged, then these "capitalists" are victims who have yet to have their disaster visted upon them. It is clear they have no concept of the realities imposed by an actual long term emergency."

I have to disagree with your analogy. I think that it's a mindset, rather than a given.

Let's take a look at another situation that is a personal disaster and how those involved look at it.

Congresswoman McCarthy from New York got involved in politics after her husband was killed and her son was wounded by Colin Ferguson (IIRC) in the Long Island RR shootings. Her reaction was to call for stricter gun bans even though NY and NYC already had about the most restrictive laws in place and they are useless.

Compare her reaction to Suzanna Gratia Hupp from Texas. After her parents were murdered in front of her in Luby's cafeteria when the gunman was able to shoot and reload repeatedly because no one was able to carry their firearms into the restaurant, she lobbied for and helped get concealed carry passed into law.

Same with natural disasters, some will want the government to step in to protect them and others will take the initiative to take care of themselves because they have learned from what happened.

This article has nothing to do with long term profits. It's about taking advantage of a desperate situation just to make more money.

Doctors, lawyers, tow truck drivers and ambulance drivers all take advantage of people in desperate situations. Should their professions be banned?

And what difference does it make whether or not the profits are long-term or short-term? A man with a pickup truck who wants to haul needed supplies into a disaster area needs profits more than anyone. He needs the money so he can go back and purchase another load.

Can I afford to buy it at his price? Can I move it after I've bought it? These would be the two major determining factors.

Yes exactly. But you are the one who should decide. By buying at retail and selling at retail-plus you are taking risks (like alienating some of your customers). The extra profit you make should offset those risks and you should not have to justify yourself in court.

Then the Ntl Guard came in (on the 5th day) and started giving away water, ice, baby food, hot showers, etc. Pity any merchant what was sitting on big inventory of those items after that.

A lot of things can spoil in five days. If I had a lot of expensive perishables I would be glad to pay extra for a few bags of ice.

The man who sells out his stocks in five minutes and shuts down the store when he it is needed most is no good to me." Not according to the only one on this forum who actually happened to be a merchant during a hurricane disaster. Ask him if he's a pinhead.

I don't think he's a pinhead. I think he's lacking in courage. It takes courage to do what is right -- no matter what the pinheads would have you do.

calculate the cost of delivering fresh water to the people living in the disaster area, I can guarantee you that the cost will exceed the $10 per gallon that the merchants weren't permitted to charge

Right. The value of a thing is what it costs to replace it. Merchants should not be expected to sell things for less than their value.

Poor people in the USA, who can somehow afford $100 shoes, air conditining, and cable TV will, according to you, be priced out of the market for water (or fuel oil) if it goes from, say, $1 to $4 a gallon? You are the irrational one.

Yes, I guess I would be "irrational" if I ever said such a thing.
Unfortunately you have twisted my statements to the point they are totally unrecognizable.

Try reading my post again and maybe responding to something I actually said. Ok?

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