Free Enterprise vs. Orders to Stop Price Gouging

Hijacked from N.B. talk show host.

Suppose I rent a big semi, load it up with all the gas generator sets, Pumps, building supplies etc. that it will carry and take it all to S. FL. Now I want to sell it for what ever a willing buyer is willing to pay (i.e. the price I set, maybe 2x or 3x my cost in KY). What right does anyone have to say I can’t do so because it is “Price Gouging.”

Can Price Gouging be defined?

In Florida (and some other states) it can.

Price gouging is taking advantages of temporary shortages or demand spikes caused by a natural disaster or other unexpected emergency to charge prices far in excess of what the market would normally bear.

Free enterprise is one method among many for determining the proper allocation of scarse resources. It’s just a tool – not some not an inviolate, absolute universal good. It tends to be a better solution than centralized control in most situations because in a free enterprise system the decision makers tend to be closer to the sources of information (I know how many lawnmowers I need better than somethin in Washington) allowing for supply to better track demand and for the system as a whole to respond more quickly to change.

Then the question is: Does price-gouging during a disaster do more harm than good? On the upside the promise of huge profits is a powerful incentive for people to transport scarse goods during an emergency. On the other hand, gouging feels fundamentally unfair to those being gouged (“What, you’re kicking me when I’m down?”) and the damage that it causes to the social fabric in times of crisis (when you really want everyone to feel motivated to pull together) may not be worth it.

Consider that often people will gouge even though they are not doing any extra work to justify the additional cost. For example, if you truck generators into a hurricane zone you have a better justification for gouging than if you’re a filling station owner who jacks up the price of the gasoline that’s already sitting there in his underground tank. This latter sort of gouging doesn’t provide any sort of positive economic incentive – it’s just profiting off the the misfortunes of others.

One could argue that gouging also encourages consumers to refrain from buying scarse resources during a crisis. However a large price spike will mean that the burden of doing without gasoline/food/lumber/whatever will fall inordinately upon the poorest members of the community – those who already have the fewest resources to weather a temporary crisis. In this situation, rationing is a fairer way to see people through the emergency.

The upshot is that gouging can only be justified if it can be shown to actually provide a real economic incentive during a time of crisis. Otherwise it falls in the category of other free market breakdowns like monopolies and usury where the minor advantages of maining a pure free market are outweighed by other greater disadvantages.

A government enforced program to ensure that supply is kept below demand. Most successfully used in the former USSR, although mistakenly adopted by the US at precisely the times it shouldn’t be. Very effective at creating long lines. :slight_smile:

The FL law begs the question. Grossly and unconscionable are imprecise terms subject to the views of the state (gov’t.) What one considers a fair return on investment is price gouging to the the other.

The state (gov’t) should have no interest in a transaction between a willing buyer and a willing seller when the have agreed on the price.

On the other hand if you have to inquire as to the price of a big yacht, you can’t afford one! don’t ask.

I’m not convinced that your assessment is correct.

First, for the gas station owner to successfully sell the gasoline at high prices must mean other gas stations don’t have gas in their tanks, or that the tankers that will provide additional supply are delayed. In other words, that gasoline has become a scarce resource.

In that case, raising the price has the “positive economic incentive” to help match supply and demand. Prospective customers with the most productive use of the gasoline will be able to justify the increased expenditure. Joy riders (and SUV drivers) may think twice about paying the price.

I liked your post, by the way, but I struggle to accept it.

In your OP, you used the term “right.” If we’re talking about rights granted to you under the various constitutions and laws of your jurisdiction, then you may very well not have the right to set your own price depending on a number of circumstances. The Florida law is a perfect example of this. If you are referring to “right” as some inherent right that all human beings have regardless of government, I’m a little hard pressed to put the right to charge whatever price one wants at the same level as say, the right to live.

As for the term you used, “interest,” the government certainly does an interest in controlling prices in this case. In a crisis situation such as a hurricane, it’s usually the government that has to provide relief services, and government workers don’t have time to shop around for the best price on gas or food or whatever. So, by preventing price gouging, the government saves taxpayers money. To carry this further, price gouging hampers relief efforts provided by private charities and individuals for exactly the same reason. I seriously doubt Florida is going to care what you charge for big screen TVs or luxury yachts, but they well might care what you charge for diapers or clothes or food.

It also discourages arbitrage, or people setting up supplies specifically in order to sell them in these types of conditions, leading to the very shortages the law is trying to prevent. If I know the government is going to define the price I can sell stuff for, I’m unlikely to make a hedge investment in supplies. So, it cuts both ways. It’s not like it some great fluke of nature for a hurricane to hit Florida. Better to save these type of severe measures for TRUE disasters-- like the aftermath of the 9/11 attacks, which simply can’t be predicted.

“Price Gouging” serves perfectly valid and necessary economic function:

  • it allows rare and necessary good to flow to the areas of highest demand. For example, in an emergency a lot of people might decide they should stock up on gasoline. But for many, it’s not that necessary. But on the other hand, the increase in emergency services also strains the supply of gas, and they need it a hell of a lot more than someone who just wants to drive to Grandma’s for the weekend. So if gas goes to $20/gallon, suddenly Grandma’s doesn’t sound like such a good idea. Making the supply available to those who need it more.

If you fix prices in an emergency, you’ll get one inevitable and almost instant result: Shortages of necessary goods. And now you’ve broken the mechanism that tells producers and distributors where it really needs to go.

The other effect of anti-price gouging laws - you reduce incentive to speculate on disaster supplies. For people to be willing to stock disaster supplies for infrequent disasters, they have to see profits high enough to warrant not just buying the inventory, but tying capital up in for long periods of time. And of course, to take the risk that there won’t be a sufficiently large emergency for years or decades, meaning the inventory may be a total loss. Excess risks must equal excess profits. Take away the ability to raise prices of goods in an emergency, and you’ll find that the next time you have one there won’t be nearly the supply of disaster goods as there would have been had the market been allowed to work.

[QUOTE=Sam Stone - it allows rare and necessary good to flow to the areas of highest demand. For example, in an emergency a lot of people might decide they should stock up on gasoline. But for many, it’s not that necessary. But on the other hand, the increase in emergency services also strains the supply of gas, and they need it a hell of a lot more than someone who just wants to drive to Grandma’s for the weekend. So if gas goes to $20/gallon, suddenly Grandma’s doesn’t sound like such a good idea. Making the supply available to those who need it more.[/QUOTE]

Those that have money will still be able to drive to Grandma’s for the weekend. But this time it is at the expense of the poor, who will not be able to afford gas to run the generator to keep sister’s iron lung working. The free market is an imperfect mechinism for making sure that resources go where they are needed and are put to the best use- this is exagerated in times of emergency to the point that some intervention is needed.

Disaster areas are not a good place to try out social planning and class warfare.

The pure fact is, if you fix prices below the demand level, you WILL get shortages. And the people effected will equally include the guy who needs to get his Grandma to the hospital because she has a broken leg, and the guy who just decided to fill up because was scared that he wouldn’t get gas later.

So what you’ll wind up with after that is rationing. Rather using the market to allocate resources, the government will take control of scarce supplies and start doling them out. But they’ll be far less efficient.

Somehow I missed the story about gradma in the trailer park, who died because her iron lung machine ran out of gas. Perhaps you can point us to the cite that outlines the details of that story.

The price of a certain item simply represents a merchant’s estimate of the demand relative to the supply. There is nothing sacred about a pre-hurricane price.

There might, in fact, be true catastrophes when we might need to look at other mechanisms beside the market to allocate goods. Relatively predictable occurances like hurricanes are not in that category.

You have to remember the basics of capitalist theory. It’s that a profit motive causes people to deliver better services. How does price gouging do this? Nobody’s figured out how to provide a better service by driving a portable generator to a city having a blackout or delivering a fire extinguisher to someone whose house is on fire. Price gouging is just taking advantage of someone’s temporary distress to coerce them into paying an unnaturally high price for a needed service.

The better service is a greater supply of emergency goods, for one thing. Another better service that capitalism provides is a more efficient allocation of scarce resources.

Use of the market pricing mechanism and governmental relief measures are not mutually exclusive.

What about the circumstances that others have raised, such as a gas station owner who happens to have a tank full of fuel under his station when neighboring stations are destroyed by a earthquake. What better service is he providing in the aftermath of a disaster? He didn’t anticipate the disaster and stock up. He just happened to get lucky while those around him were unlucky. He’s able to sell his gas for five dollars a gallon because for a few hours he’s the only seller in town. And how is allocating resources based on who has the most currency in their pocket efficient? Do I deserve gas more because I happened to have withdrawn money from an ATM an hour before the power went out?

It’s a mistake to think that because capitalism usually is the best way, it’s always the best way in every possible circumstance. Capitalism works best over the long term but it requires time for its self-regulation to achieve results. In some circumstances, such as the immediate aftermath of a disaster, time is a critical facotr and it’s necessary for a planned economy to take over temporarily.

To take advantage of your fellow man because he happens to be in a position of vulnerability is unconscionable. Attempts to justify it in the name of capitalism are pretty lame. Capitalism is about making a fair profit, not using disasters as a license to steal.

Cite? Captialism is about making a profit, period.

Nice try, but you cannot redefine the word “steal” to mean “make more money than I want you to under the circumstances”.

Once again, it’s not an either/or situation. The government can provide aid for those who really need it, and merchants can use the price mechanism to allocate resources in the private sector.

If the issue is lack of supply, can you explain how holding the price low will increase the supply? It just allocates the resources to whoever gets there first.

I think who gets there first is a little more fair than who has the most cash.

To the generator example: If you normally sell them for $500, but you truck them down to the hurricane site you deserve to recoup the expenses let’s say it costs $100 per unit to ship, so you sell at $600. But if you sell them for $1500, that’s gouging.

If the people are able and willing to pay a fair price for needed supplies, then they do not require government assistance, they just need to get a fair shake.

Sorry but I do not have a cite for the breaking point between a fair profit and gouging, I believe it to be a matter of morality. If your motive is to help out your fellow man, you’ll charge a fair price. If your motive is to get rich quick off your fellow man’s misfortune, you’ll gouge.

That overly simplistic analysis ignores too many real world consequences. For example, what if I truck 250 generators down at $100/pop but am only able to sell 50? There is always risk involved in making economic decisions, and the price mechanism is the best way to communicate that risk throughout the system.