TCS Daily

In Defense of Price Gouging

By C. C. Kraemer - September 23, 2003 12:00 AM

A little more than a month before Hurricane Isabel made landfall, North Carolina Gov. Mike Easley, one of the first governors to plead for federal aid to clean up after the storm, signed a bill that outlaws price gouging during and after natural disasters. When Isabel hit on Sept. 18, North Carolina Attorney General Roy Cooper ominously reminded businesses and consumers about the new law.

"Most businesses do the honorable thing and keep their prices fair regardless of what disaster strikes," Cooper said. "But for anyone who tries to profit unfairly off a natural disaster, let me remind them that we'll be watching and we'll hold them accountable." So free enterprise and voluntary exchange among private citizens become misdemeanor criminal acts, or in some cases felonious.

Just before the storm struck, Virginia Attorney General Jerry Kilgore was also threatening merchants about price gouging, even though there are no laws in that state against raising prices on goods that suddenly become high-demand items. In Virginia, however, the governor can set prices during a disaster.

Price gouging laws are, of course, presented to the public as a protection for victims of catastrophes against the unscrupulous merchants who would take advantage of others' misfortunes. But offering such protection is a stunning demonstration of arrogance. Determining the "right" price for any commodity is beyond even the most informed bureaucrat and wisest elected official.

What is pejoratively known as price gouging is a normal and healthy function of the market and is in fact beneficial to those who are supposedly its victims. Price surges are actually information necessary for the continued rational exchange of goods and dollars. Take a commodity that becomes crucially important when calamitous events strike. Plywood is a good example because it's used to protect windows before a storm blows in and can be used to repair damage afterward quickly. When plywood sellers know the demand is going to skyrocket, the proper response is to increase prices. That does several things.

Yes, higher profits is one of them. But the act of moving prices up also has the effect of protecting against shortages of a scarce but highly important good.

Say that plywood prices triple in an area battered by a storm. If they remain at their previous levels due to limits on price gouging, the plywood will sell out in a hurry, leaving many without the protection it provides. Consumers who didn't or couldn't make their purchases early are left without.

However, if prices are allowed to rise without government controls, lumber merchants in other regions -- and anyone else who has a large quantity of plywood, such as builders -- have a strong incentive to rush their inventories to the area where the plywood need is highest.

So rather than harming the victims, the profit motive actually helps them because the result is an increase in supplies. That assures that everyone who needs the plywood will get it, an unlikely occurrence if prices are not allowed to rise. When the stores are empty because there were no price signals to protect supplies or to create an increase in them, what does a family desperately in need of a generator or propane lanterns think of the laws that they were told were intended to shield them from avaricious businesses?

The increased supplies created by price spikes benefit consumers in another way. They will eventually ratchet prices back down, probably not to original levels right away, but low enough to make the costs more acceptable to those who might have felt they were so high previously that they would take their chances without the plywood.

Substitute the plywood with any other commodity whose value rises because of a disaster -- fuel, food, bottled water, candles, batteries -- and it's easy to see the importance price increases have for those who live in the affected area. Instead of being vilified as greedy, businesses should be appreciated for the necessary purpose they serve in times of adversity.

By one account, nearly half of the states have laws that prohibit price gouging, which is likely comforting to a large segment of consumers in those states. What they don't know, though, is their elected officials have done them a disservice.


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