Thursday, January 14, 2016

On how price gouging benefits you

I often offer this video as an explanation for why "price gouging" should be allowed, especially after a natural disaster. One reason I like it is that it sets up the question under the most dire circumstances:
There's a natural disaster and a mother goes out to find a generator to run the refrigerator that keeps her daughters insulin. She finds that the only generators available are not 3x the price.
The best argument the video makes for allowing prices to rise freely as scarcity increases is that it allows people who need the item the most to stake their claim for it over people who need it the least. When a limited resource is under-priced (relative to its scarcity), it is only natural that consumers will use up every little bit of it so it will not be available at all to more people who need it the most. As the video points out, settting a low price ceiling on resource when it is limited means that people don't have to be stingy in using the resource. Before that woman who needed a generator could find the seller, the odds are that he has sold his supply to other people who might have only thought a generator was "a good idea". Maybe one guy bought three generators "just in case".  More of this in a minute.

This question is related to a previous post I wrote, Price is No Obstacle. There I tried to demonstrate that price is not a problem to be overcome. Scarcity is the problem and price is only the quantification of the current scarcity. A law that outlaws selling items above a price ceiling cannot eliminate the scarcity that has caused the market price to be increased. A government policy has the ability to create scarcity, but it has no ability to legislate abundance. Only if there is a policy that is causing artificial scarcity (as I analogized before, artificially building a mountain between its citizens and the services they want) and that policy is removed can a government action be described as increasing abundance. In that case, the government action is Get Out Of The Way.

This is why centrally planned economies are subject to scarcities that do not exist in freer economies. Ironically, scarcity (such as the cost of the highest speed Internet) is typically the justification for more government involvement.

"If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand."
~ Milton Friedman

Libertarian consumer reporter, John Stossel had a famous argument against price gouging laws on ABC News. Here he took on a real world example of exactly the situation in the first video above. There was a hurricane in the Gulf. The citizens of the town sent out an appeal for more generators.
John Shepperson was one of the "gougers" authorities arrested. Shepperson and his family live in Kentucky. They watched news reports about Katrina and learned that people desperately needed things. 

Shepperson thought he could help and make some money, too, so he bought 19 generators. He and his family then rented a U-Haul and drove 600 miles to an area of Mississippi that was left without power in the wake of the hurricane. 

He offered to sell his generators for twice what he had paid for them, and people were eager to buy. Police confiscated his generators, though, and Shepperson was jailed for four days for price-gouging. His generators are still in police custody. So did the public benefit?
 John Lott offered a argument he hardly invented against price gouging laws directed at hotels:
Stamping out "price-gouging" by hotels merely means that more of those fleeing the storm will be homeless. No one wants people to pay more for a hotel, but we all also want people to have some place to stay. As the price of hotel rooms rises, some may decide that they will share a room with others. Instead of a family getting one room for the kids and another for the parents, some will make do with having everyone in the same room. At high enough prices, friends or neighbors who can stay with each other will do so.

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