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.
LOL :)
Or if you donate 10% of what you gouged to poor little black children in Africa. Then it's OK :)
I think of people's "problems" with "price gouging" is that it makes people feel more responsible for the bad things that happen to them.
Suppose, for example, that you knew that you would lose $10,000 of inventory if you didn't buy a certain amount of of ice, but that your inventory would survive if you did. I offer you the ice for $5,000. In such a case, if you bought the ice you'd feel unhappy with the loss of $5,000 but feel you had nobody to blame but yourself since you paid it; if you didn't buy the ice, you'd feel responsible for the loss of inventory since you could have avoided it.
By contrast, if nobody offers you the ice, then you can simply blame the loss of inventory on an Act of God; you can hold yourself blameless for it.
Rationing will check deliberate wastage, though often not as effectively as a market (someone who is on'y allowed one pound of something per week won't waste more than that, but may well waste their pound even if they don't really need it). Unfortunately, it often encourages hoarding (someone who is allowed a pound of something per week and thinks they might need four pounds of it a month from now will likely decide to buy a pound a week well in advance of their possible need. If resale of rationed goods is forbidden they may end up sitting on the goods if the expected need does not materialize.
Rent control illustrates a very common fallacy in people's understanding of economics. They perceive markets as a contest between suppliers of goods and services, who try to raise the price as much as possible, and consumers, who try to lower the price as much as possible. They perceive that things like rent control help the "consumers" of property, while things like minimum-wage laws help the "suppliers" of labor. Unfortunately, their view of the "contest" is entirely wrong.
In reality, suppliers compete against suppliers and consumers compete against consumers. Suppliers would like prices to be high, and consumers would like them to be low, but in reality only suppliers can increase prices and only consumers can lower them. What rent control and minimum wage laws do is to prevent "consumers" of property from increasing prices, or "suppliers" of labor from decreasing them.
If there is a shortage of certain goods in a market, some people who want goods can increase their likelihood of getting them by offering more money than other people. In an open market, it is these buyers, rather than the sellers of the goods, who are responsible for the increase in price. The function of "anti-gouging" laws is to remove these buyers' competitive advantage over other would-be buyers.
It's interesting that markets are so often seen as having buyers in competition with sellers, when the reality is in fact the opposite.
Right. That means we're exactly alike! ;)
He is the one who showed the courage. He enforced quotas but sold at normal prices.
You have just been called a coward
Well it had better be SO good that you can afford to move out of there lickety split as soon as disaster is over, and oh that you can also forget about your former friends and neighbors. In this world, young man, there are some things which cannot be measured in dollars and cents.
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 think you will find that the people who are the most vociferous in their right to do as they please with their own property are the same people who will give you the shirt off their back in your time of need, with no expectation of recompense whatsoever.
A desire for freedom and liberty is not in any way at odds with a sense of humanity and generosity, even though marxist doctrine would have you believe the exact opposite.
This nation was founded by people who were willing to kill and to die to preserve their right to determine how to live their lives, and how to control their own property. Yet, they did so at great -- incalculable -- personal expense, with no expectation of recompense for their gift to the rest of us.
The fact that I say that I own my property -- generator, food, water, whatever -- and reserve the absolute right to sell it for whatever price I so choose to sell it for -- does not in any way suggest that I would hesistate to give it to you if your life truly depended on it, and you could not afford to purcase it.
Do not insult your countrymen -- do not insult the very foundations of your nation -- by implying that a longing for freedom is anathema to any sense of generosity.
In short, do not demand of me that which I might otherwise be disposed to freely give you. You might find that I will fight tooth and nail to prevent you from taking that which I would freely give.
If you do not understand this, then you do not understand what America is founded upon.
You can count the percentage of people who would rejoice in price gouging (if they are not themselves the beneficiaries gouging) on one hand with a few fingers cut off.
And you bash a straw person. The Florida law which raised this whole issue does not restrict Mr. Pickup Truck Man for selling a pint of water for $1000.
Well, only if it cost him on the vicinity of $1000 per bottle to get it there. I would expect that he came in Chitty Chitty Bang Bang (the flying car), not the pickup truck, if it cost that much.
One thing I have observed: when oil supplies get scarce, petroleum product prices go up. When oil gets more plentiful, these prices STAY up, at least for quite a while. It sounds like there is a max() function in there somewhere.
You may escape the court of law, but the court of public opinion is more ruthless.
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