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Price gouging means a lot of things to a lot of people. Simply put it is the situation where sellers price goods or commodities including services much higher that is considered reasonable or fair. It could also refer to prices obtained by practices inconsistent with a competitive free market. It could additionally mean speculation. As such price gauging has is both beneficial and detrimental attributes to the society.
When considered in times of disasters and or natural calamities, it has been argued that price gouging is majorly responsible for additional hardship on the affected. However as economist Walter Williams argues “passionate issues require dispassionate analysis” (Cox, 1997) this is because during emergency conditions, price gouging will evoke strong emotional responses that are understandable but terribly wrong-headed.
During a disaster what happens? There is a simultaneous shift in demand (increase) and supply (decrease) which forces the prices of goods and services upwards. Proponents of price gauging argue that preventing it would increase misery and that it is even a desirable practice. In deed it increases the availability of goods and services following a disaster. The ability to charge higher prices makes additional sources of supplies affordable. For example, food and construction workers from nearby unaffected areas will stream into the disaster zone because they command a higher price there than in their original areas. This effect is called arbitrage, and is distinct from (and in addition to) charitable donations.
Hurricanes can be predicted well enough that the affected area is likely to be known in advance. This makes it possible to stockpile some kinds of goods. Stockpiling has the benefit of making important goods immediately available in quantity at the site of the disaster. For an area to stockpile some good represents a significant increase over its typical demand; this strains the supply chain and increases costs. Thus, stockpiling is only economically feasible if those increased costs will be met by increased revenues from selling the stockpile after the disaster. If firms cannot raise their prices after the disaster (i.e. “price gouge”), they will not stockpile before it.
People will work longer hours if they’re compensated with higher wages. Some people may charitably donate their extra time, but the rest require more money to overcome the disutility of labor. If the wage was right, people would be eager to work 10-, 12-, 14-hour or longer days. If laws prevent the payment of these higher wages, those extra potential hours worked are lost. It takes longer to repair the damage, with people inconvenienced in the meantime.
Price gouging results is a better allocation of goods and services, because the alternative is shortages. Laws against price gouging are a form of price control, a price ceiling, and any price ceiling below the market-clearing rate creates a shortage. In an unhampered market, goods are available to whoever is willing and able to pay. In a shortage, allocation is haphazard, with goods going to people who show up first, or wait in line, or have influential friends, or they may be rationed, or many other possibilities.
The unhampered market lets people communicate the urgency of their need with dollars. The most important (i.e. valuable) uses for those goods will offer the highest prices for them, bidding them away from less important uses. If potable water is scarce and therefore more expensive, water for drinking will outbid water for decorative fountains. If prices were unchanged, there would be a shortage, and while this case is intentionally so clear-cut that almost any government allocation scheme would work, most cases are not so obvious: How much water for bathing versus irrigation? The market can answer that question — do you believe the government can?
Among economists the above arguments make sense but to a lay man going this are irrelevant. It is a fact that many lay people believe that price gouging is bad. This view is most often that not fueled by politicians looking to gain political mileage. Interesting is the knowledge that the vast majority despite being confronted by the economic arguments, dismiss them not because they believe that they are wrong but rather that they are irrelevant.
The physical reality of disaster recovery is that things have been destroyed and it takes time and resources to recover. It is physically impossible to satisfy everyone’s wants immediately after a disaster. That option isn’t on the table. There aren’t enough resources to go around. The market impact is that the things that are so important to so many people are expensive precisely because they’re so important to so many people.
With the knowledge that goods are available to whoever is willing and able to pay in a price gouging situation, this is what makes the majority upset. Ability to pay has no relationship with need. The rich are able to outbid the poor. A poor person must spend a huge part of their income or savings (or go into debt) in order to compete with the rich. Or, they must wait until prices come back down.
This seems ethically wrong to most people because they link need with desert. This is standard altruism. Need is the source of desert. A person’s need creates an ethical obligation to help them.
But whether a person is rich or poor doesn’t affect their needs. People are usually considered equal, so that if a fixed amount of resources could repair one rich person’s home or the homes of two poor people, it is the poor people who should get the resources. For allocating based on dollars instead of people, the market fails, by this understanding of ethics.
In addition to favoring the rich, “price gouging” is observed to increase the hardship of already-suffering people — first their homes are destroyed, then their bank accounts, too! This is reflexively viewed as people being taken advantage of by profiteering merchants. The Florida Attorney General described it as “trying to take advantage of neighbors” above. Again there is an issue of desert involved. The merchants are viewed as receiving a windfall profit they have not earned. For adding insult to injury and giving wealth to the undeserving, the market fails, by this understanding of ethics.
It is of little benefit to respond that market allocation of goods is better than government allocation, or that prices are merely a reflection of utility, or that higher prices bring about an increased supply. These things are true, but not persuasive. The anti-capitalist mentality is rooted in altruist ethics, not in a lack of understanding of economics. Capitalism and altruism are fundamentally incompatible. Most people, faced with the choice, pick altruism. They will not be persuaded by economic arguments, because economics is derivative of politics and ethics, not the other way around. Indeed it is clear that price gouging has both beneficial and detrimental aspects depending on which view one propergates.