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.

So far nobody has pointed out the direct conflict between price-gouging and Judeo-Christian religious principles.

It may be efficient, but it may also be immoral.

But I think some allowance should be made for the fact that costs of sellers go up during such periods, too. It costs more to operate your business and raising prices to compensate for your increased costs is not price-gouging.

Your post is the most sensible thing on this thread.

Ther eis one thing to add a little more to cover cost of transport, ( as the other poster inferred). there is another to simply gouge and yell, "Hold out the bowls, Ma! it's raining soup!"

That last is simply unclean and certainly isn't Christian.

And you are right.

Profitting off your neighbor's suffering has a nasty way of coming back on you.

Makes people mad, and you need them.

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.

See? There is no need for government restrictions on gouging. The free market works.

CTOCS wrote:

I imposed a limit of one large ice and two gallons of water per family. It seemed fair to me to spread the resources to as many families as possible and not to the one rich guy who could afford it all.

And don't anyone start on me with any "communism" BS.

You have to live through one of these disasters to fully appreciate and understand it.

Sounds like you handled it very well.

If the community goes down, you can, too.

And since you are living there long-term, you need to take into account the future, and how the people will interact with your family if you gouge....

Sure, you pay more now, but what do you get LATER by way of good will and help YOU might need?

Makes a difference.

Suppose the dying person doesn't have $25 for that life-saving drink of water.

Then, the seller, not having sold it at below market prices to people who didn't value it highly, will have it on hand to GIVE to the dying person, or trade it for goods, or against future earnings.

Do you support government penalties for raising prices to market prices in a crisis?

"Call me names all you want."

Funny how the people who always start the name calling act all verklempt when it happens to them...

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.

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.

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.

And remember, one person selling an item at 3x the normal price doesn't preclude anyone else from selling it at or below cost or giving it away. IT"S MERELY ANOTHER OPTION!!!

And it's a good option because many people on the other side of the disaster equation do the opposite of gouging - hording. Don't see you condeming that here.

Letting the market determine the price of a needed item is extremely humane- it acts as natural discouragement of hording. So instead of a guy who only needs 2 gallons of water buying 10 because it's dirt cheap and he wants it all - the price makes him justify whether or not it's worth the extra cost. Then those extra 8 gallons are there for a family of four that need them. They're not sitting away somewhere unused because an 'evil horder' got to them first.

Having 1000 gallons of water available at $5 a gallon is better than having no gallons of water available at $1 a gallon. 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 imposed a limit of one large ice and two gallons of water per family. It seemed fair to me to spread the resources to as many families as possible and not to the one rich guy who could afford it all.
And don't anyone start on me with any "communism" BS.

You have to live through one of these disasters to fully appreciate and understand it.

The sad fact that you conveniently overlook is that people who have "lived through one of these disasters" are the least likely to need those goods in short supply.

Everybody in Florida is bombarded by all media sources at the beginning of the hurricane season about PREPARATION. Those that heed the advice and understand the risk, make the necessary preparations and have no reason to risk price "gouging" for essential emergency supplies.

Those that don't heed the advice, dismiss the risk, or are just plain too dumb to function in the real world, will have to seek out some kind soul like yourself to assist them. The unintended consequence is that those who are unprepared, but suffer limited or no pain, have learned nothing. I'd be willing to bet they are the same ones that will be back after the next hurricane.

It does when nobody else can get any of the item to sell at a lower price or give away free because they're in the middle of a disaster area.

And what condition is most likely to increase supply to the disaster area at the fastest possible speed?

Could it be high selling price?

So everybody in Florida with a brain has several weeks' worth of food, water, batteries, etc., buried somewhere in case a Category 4 or 5 hurricane comes along and destroys their entire home and everything inside it?

Forgive me if I don't believe that.

"Am I on the right website?"

Yes, last time I checked this was FREE republic. Meaning that if someone wants to rent a truck filled with bottled water and sell it for $5 a gallon where there is a water shortage, he should be FREE to do so. If anyone else wants to rent a truck and sell water below cost or give it away, they should be free to do so as well. That's the position I've seen people advocating here.

Condeming people who are filling a need just because they make a hearty profit while doing it is obscene. After all, anybody who is posting on this thread obviously isn't currently renting out a truck filled with supplies and driving it down to florida to give them away.

Sure, some may have given a few bucks here and there, but who in the end is doing more good for the people affected by the hurricane? The person sitting on the internet pontificating about how noble their beliefs are, or the guy driving down a truck down to florida filled with stuff people need because he can make a bigger profit selling it there instead of in his home town?

And what condition is most likely to increase supply to the disaster area at the fastest possible speed?

The restoration of access to the affected area; reopened roads, power turned back on, etc. The companies that usually sell a given product will be just as desperate to get back in there and start making up for lost sales at regular prices. They're also the same companies with the infrastructure to resume sales most quickly.

And of course, even if some gouger did magically find his way before the roads were opened, his business would die the moment access was restored and the usual companies with their permanent infrastructures moved back in and resumed sales.

It's a great argument. If demand skyrockets and prices are fixed you have a Soviet system.

Ann and I were in Gulfport, MS during Hurricane Elena in 1985. Ice was perhaps $0.79 a bag before the storm hit. The day following the storm an enterprising gent brought a truckload in and proceeded to sell it from the K-Mart parking lot. The general manager of the store went out to check out the situation and asked the iceman what he was charging. $2 per bag was the reply. The manager told him to make it $1.50 per bag or he couldn't use the parking lot. No government official was involved. The manager was simply selling the use of his parking lot for a portion of the man's profits. He didn't push him all the way back to normal retail; he recognized that the man deserved some extra money for providing ice during the several day power outage.

Ann went to work that same day after the hurricane. With no power, several adjustments were made. Camp stoves, lanterns, batteries, and that sort of thing were placed on display right inside the entrance. Customers requiring items not in the front display customers were led by an employee with flashlight into the store. As the registers were not operating everything sold was recorded by hand. An emergency warehouse shipment was arranged and was planned to arrive about 11:00 that evening. Many customers came back to meet the shipment and most of them helped unload the truck.

Sure, some may have given a few bucks here and there, but who in the end is doing more good for the people affected by the hurricane? The person sitting on the internet pontificating about how noble their beliefs are, or the guy driving down a truck down to florida filled with stuff people need because he can make a bigger profit selling it there instead of in his home town?

Um, just how many people are doing that? Or would be if they were allowed to sell at exorbitant prices? I would imagine the cost of hauling my goods hundreds or thousands of miles would require one hell of an increase in prices to make a larger profit than if I just sold my goods at home like I always do.

"And remember, one person selling an item at 3x the normal price doesn't preclude anyone else from selling it at or below cost or giving it away."

"It does when nobody else can get any of the item to sell at a lower price or give away free because they're in the middle of a disaster area."

If a guy from ohio or wherever can get to a disaster area in florida to 'gouge' on prices, so can a guy selling at cost or a business like philip morris giving away truckloads of water. That's a lame argument. If he can get there, so can other people.

As the poster from the hurricane isable story commented, he didn't change his prices, because he was wary of the long term impact. He also ran out of ice and water quickly. Maybe some people bought more water than they needed because it was so cheap. Maybe someone who needed it went without because the ice and water were gone.

Maybe that need could have been filled by a guy who saw a potential for profit by getting a truck to the affected area. Most people acting in a profit motive will fill a need faster and more effectively than those not making money. They'll work longer hours to get their products sold, thus helping more people.

Ignoring that fact is ignoring thousands of years of human history.

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