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Price Gouging During Emergencies
a Good Thing?

During hurricane Katrina there were instances of prices being raised, as there are during most natural disasters and emergencies. Of course, people hate the idea of stores "taking advantage" of them during these events, so politicians threaten to prosecute store owners accused of price gouging to win public praise and perhaps re-election. However, is it really such a bad thing to raise prices during a disaster?

What is gouging anyhow? One definition is, "pricing above the market price when no alternative retailer is available." In the context of a natural disaster people don't care if there are other retailers, especially if they all raise the prices of things. Furthermore, just raising the price of something during these times is considered gouging.

Now, some of us think that in a free country people should be allowed to name any price they want for THEIR things (would you like it if the government made you lower the price on your home, car or labor when you sold them?). But setting aside that argument, there is another reason we should let the markets work - even during a disaster. It is that prices serve an important function.

Why Price Gouging Serves Us Well

Let's look at a plywood retailer during a hurricane as an example of why prices need to rise.

We can probably agree that a retailer doesn't want to hurt people, but just wants to make more profit. We can also understand that raising the price accomplishes this profit goal only if the retailer can still sell his goods. For example, he won't make anything on his high-priced plywood if it's priced so high that nobody wants it, so he still has to price it to move.

When a hurricane is coming, all the plywood will still be sold, but for more. It isn't really "above the market" however, because markets change, and the "market price" is naturally higher when demand increases, as it does before a storm. But all that plywood will still be sold in any case, and will be covering windows and protecting houses somewhere.

What the higher price does, though, is more than just put more money in the retailer's account. It does something else that benefits us all. Higher prices allocate the plywood to better uses.

Let's start at $18 per sheet of plywood to understand this. A man buys enough plywood to cover not only the windows of his house, but the windows on his shed. He even buys too much, "just in case" and has three pieces left laying in his basement. Across town, some poor family is waiting for the hurricane with their front window uncovered. They couldn't buy any plywood because it sold so fast at this "normal" price.

What if the retailer raises the price to $60 per sheet? That man, and everyone else, thinks more carefully about how much to buy. People purchase only enough for the more important uses, which means more front windows protected and fewer pieces sitting in basements. Joe might have bought ten sheets of plywood, but now gets just six, leaving four more in the store for someone else.

That's not the end of this story, though. When prices rise during emergencies, it motivates companies to be better prepared to serve the community. The higher prices, if they are not discouraged by politicians and prosecutors, mean more supplies are brought to the areas where they are needed - because this makes more money for the retailers.

Wal-Mart doesn't advertise it, but they monitor weather and stock their stores accordingly. For example, they might bring in an extra thousand snow shovels before a predicted blizzard. It's a wonderful service for the community, so why do they hesitate to let it be known that they do this? Because people are uneasy with companies making a profit from their adversity.

It is a shame so many people feel this way. We don't think it is wrong for a doctor to profit from helping us during our illnesses and injuries. Those who serve should profit. Now, I wouldn't like paying $60 for plywood, but I like the idea of it being available, and if that's the price that makes it available, that's what we need. It's better than punishing the retailer just so whoever runs to the store the fastest can cover his shed windows and leave unused plywood in his basement at the "fair" price of $18.

Rising prices automatically allocate supplies to their highest economic uses, so these prices (in the example above) result in less damage to homes and businesses. At $60, more people will use that plywood to cover expensive windows rather than sheds and doghouses. The result is fewer and smaller insurance claims, which in turn means lower future rates for all.

This is all something economists know, and it applies to most things. When we let prices rise things are allocated to better uses. Of course politicians and others are often ignorant about economic issues, or just afraid to be honest. Many who understand the issue probably believe that the public can't be educated to see that what we refer to as gouging can make us all better off.

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Price Gouging