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.

You guys seem to be arguing that price-gouging is an essential part of capitalism in a disaster area. There is no way that it is the smart economic decision to be made by a local business. The locals are going to remember exactly who shoved it to them when it was really tough, and their business will be done a few months after things are back to normal. Those businesses would die out in the long term, and another small batch of new businesses will suffer the same fate for their poor decisions the next go around.

You can say it's a part of capitalism, but it's for the pinheads that couldn't make an ice cream stand in Texas break even. As for the people who drive stuff down to sell it at %1000 percent profit, well pornographers and drug dealers do well in the free market too, but it they're still shi%%% people.

"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."

Depends on the prices he thinks he can get and what he's currently getting at home. And that's also one of the reasons to let the market determine the prices and not government - Unless the seller can afford to just give away their goods, making the effort to sell to people in a disaster area must be worth the time and expense of his troubles. People here and the government want to limit how much he can charge - very likely limiting his motiviation to make an effort to fill a very real need in a disaster area.

It's one of those things were people want to think they're doing a good deed by opposing something, but ultimately they're harming the people they claim to help.

Is someone in florida in need of fresh water better off because a guy in georgia who has fresh water didn't go because he couldn't make enough money to justify the trip??? Or is he better off getting the water and paying a few extra bucks???

Another poster attacked walter williams for being "good on theory" but poor in application. The kumbaya approach to the real world economics of a disaster is extremely poor in application. It hurts buyers and sellers and only helps the false sense of superiority of those who wish to impose their ideals on everyone else.

"You guys seem to be arguing that price-gouging is an essential part of capitalism in a disaster area. "

YOU seem incapable of reading comprehension. Or you like putting words in other peoples' mouths. Go back and read what I said. It's nothing like what you say I said.

'Gouging' isn't essential. But being able to let the market be the determinant of the end price IS essential. There's a big difference.

I said that letting consumers and businesses be the sole deciders of what is the fair price for a good or service is the only just way to operate. This does not mean I oppose a business selling at regular prices or an organization giving them away. All three options are valid, and based on the supplier detereming what works best for them.

You give the same example a hurrican isabel merchant did - that locals will remember who gouged prices. That's fine. But the merchant also stated when he didn't raise any prices, he quickly ran out of water and ice. That meant that a need existed that he couldn't fill.

So hopefully one of three things happened for the people who needed water and ice but didn't have any and couldn't get any because he was sold out:

1. Some new supplies arrived at regular prices.
2. Some big evil company like phillip morris loaded up some trucks and gave away water for free.
or the one option people seem to dread the most:
3. A guy with some bottled water determined he could make enough money to cover his time, his gas money, and his merchandise cost, and justify leaving his family for few days, so he drove a truck full of water and sold it above regular rates to people who didn't have any water.

So let me take my turn and put words into your mouth: If the merchant ran out of water and ice like he said, and enough water wasn't shipped in free or at regular prices, you'd rather people go thirsty and die than the guy who is charging extra brings his water in to make a few bucks.

Yeah, that's evil, filling a need. Damn heartless bastard!

You are not the only one. Let's say Home Depot can sell a sheet of OSB (strand) plywood during this crisis for $200. Everyone in the community would remember that shining example of "pure capitalism" long after the immediate crisis had ended and THEY WOULD NEVER FORGIVE OR FORGET.

Pure capitalists at that extreme can never win popular support. Nobody is going to vote for people who really believe that. They will be too busy hunting them down, burning their houses and hanging them for their pure profit exploitation in time of natural disaster. Do you want insurrection? Go ahead and allow "pure capitalists" to charge anything they want to victims of a disaster.

Such "practical" profiteers would be lucky ONLY to have their neighbors spit upon them.

A fascinating discussion.

What hasn't been mentioned is that a very significant percentage of the world's population lives in what is essentially a permanent disaster situation.

The poor of Central Africa and much of the rest of the 3rd World have it a lot harder all the time than Floridians are faced with for a week or two after a hurricane.

So should the laws of economics be suspended whenever people can't afford what the law of supply and demand calls for?

Does this exclusion to the law apply only for Americans? If so, why?

Not to put too fine a point on it, but I didn't overlook anything.

The majority of the year-round locals are of limited means and not in the position to stock up on anything, much less have a place to put it.

We are separated from the mainland by two bridges over the Rappahannock River on a two lane state road. It was closed for two days while they tried to clear it. Nothing was getting in or out of here.

We had about 2 days notice. Even then NOAA was dithering as to actual track.

The day it hit, we had the usual charlatans driving around trying to sell $400 gensets for $1,000, and $1.29 gal gasoline for $5.00. Not many takers.

The ones who "heeded the advice and understood the risk", as you say, were the rich white folks with the $1M+ riverfront houses and yachts that only come down on weekends anyway. NEWSFLASH: They didn't come down that weekend!

And, I'm not some kind soul that took pity on a bunch of people and gave things away for free. I opened and operated on a limited basis in difficult circumstances. I charged the same prices as I did the day before the storm. The 3 Food Lions within a 20 mile radius of us were all closed (hurricane, you know). Hells bells, it took the Ntl. Guard 5 days to get here with trucks full of ice and water.

And yes, they will be back after the next hurricane. You want to know why? Because I'll be open!!!

See -- that's exactly the point. You did that on your own because: 1) it made good business sense in the long run, and 2) it was the right thing to do.

The author makes a very good point, though, about how scarcity brought about by emergency conditions coupled with price controls imposed by law are a recipe for disaster in one key respect: they inevitably lead to the over-consumption of resources that would otherwise be used wisely if their prices rose dramatically.

He basically laid out California's energy woes a couple of years ago in a nutshell, but in the context of a natural disaster.

You are right. This is why I am against giving ANY assistance to the poor people of Sudan. Sure they are getting killed on a massive scale but there is no profit motive in it for us so why even acknowledge them? Survival of the fittest and all that garbage....Let the old people starve and die of thirst in disaster zones, they aren't willing to get raped for the necessities of life like you are.

I wonder how Judaeo-Christian principles would apply to a business owner who refrains from "price-gouging" in a time of need, only to see his customers turn around and sell the products at exorbitant prices that they just bought from him at "normal" prices.

What would be the moral judgement of someone who required people to pay high prices for scarce goods (while allowing hardship exceptions at his own discretion) but made clear to everyone that any money above the ordinary selling price would be used to fund further relief efforts?

"You are right. This is why I am against giving ANY assistance to the poor people of Sudan. Sure they are getting killed on a massive scale but there is no profit motive in it for us so why even acknowledge them? Survival of the fittest and all that garbage....Let the old people starve and die of thirst in disaster zones, they aren't willing to get raped for the necessities of life like you are."

Oh please. That is likely the most pathetic post I've ever seen on this site. I said nothing like you insinuated. If an outright lie and distortion is what you consider a good debating tactic, then air america probably has a job opening for you.

No where - not once - did I say people shouldn't donate or give away to help people anywhere. All I said was that if someone is willing to meet a need and is able to make a profit at it, even in times of disaster - that the government or wanna-be-do-gooders like yourself shouldn't be able to stop it - because the alternative can be people ACTUALLY DYING because of a unmet,vital need.

It's merely another option that should be available - because the alternative can be DEATH. But you would obviously prefer that. To you, having a morally superior attitude is apparently more important than actully filling a vital need. You're a hollow, puffed up shell of a human being who cares more about looking like mother teresa than actually make sure if someone needs something, it's there.

Thanks for one of the most disgusting posts I've ever seen here. You are truly a horrible person to be willing to completely distort what somebody said in a lame attempt to win an argument.

Good point, but natural disasters are just that - disasters.

When was the last time a big one hit the "west" coast of Florida? These people looked at the actuarial tables and said, "What the hey, once every hundred years, that's acceptable to me."

While I disagree with price controls and rationing in general, in times of emergency, I think compassion should rule the day.

In our particular case, over-comsumption of resources did not occur because we ran out of resources to consume. Even if they were available, and their prices rose dramatically, the people needing those resources did not see their income rise to meet it.

CA's energy crisis was entirely man-made and greed driven. I don't think the Big "G" plans hurricanes that way.

There was a scene in one of the Little House on the Prairie books that would seem to apply to a situation like this -- on a number of levels. The town where the Ingalls family lived was teetering on the brink of starvation one winter, because the weather was so harsh that the railroad stopped running.

Two young fellows took a risky trip through the bitter cold across the prairie to a farm where a settler was storing piles of wheat for seeding the next spring, and they negotiated an exorbitant price for his grain. He came across as a pretty cold and heartless guy, yet the buyers understood exactly what they were dealing with: They had to compensate him for the hardship that would be caused when he had no crop the following year.

They finally got back to town with the wheat after nearly perishing in a blizzard, and left all the wheat with the store owner who had provided the cash to buy it. They didn't take a single penny for their efforts.

The next day, word got back to them that the store owner was charging substantially more than he had paid for the wheat. The two fellows who had delivered it were rightly p!ssed off. When the townspeople confronted him, he laid out all the "free market" arguments -- and people threatened to steal it from him by force. Ironically, the wiser men among the town's residents agreed with him -- and they told him that they would pay whatever price he asked, but they would run him out of business once the trains started running again in the spring.

But the two guys who got the wheat threatened to do physical harm to him. They told him that they didn't charge a cent for delivering the wheat because they looked upon the whole thing as a mission of mercy to keep the town from starving. Besides, he couldn't possibly pay their price if they had charged him the "free market rate" for the risks they took on that trip in -40 cold with a blizzard approaching.

My wife and I now go out of our way to shop at Home Depot after I heard they sent trucks of tools to help the rebuilding in Iraq, and donated thousands of hours to do home repair for women whose husbands are fighting in the war. I've got no problem with Lowes, but HD made a good "strictly capitalist ;)" move, and gained a few customers.

Kind of how some companies would lose customers if they overcharged during a disaster. Some people on this thread could right the book "Capitalism for Dummies.....by dummies"

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