Hurricane Harvey has proved to be one of the worst storms in years, and caused billions of dollars of damage. Hundreds of thousands of people have been forced out of their homes by rising floodwaters and basic necessities are in short supply.
In other words, all the ingredients are present for a phenomenon labeled by detractors as price gouging. It’s the temporary increase in prices when supply falls during an emergency.
A brilliant video from Learn Liberty explains three reasons why price gouging is a good thing:
Price gouging isn’t mandatory
Just because someone is charging an excessively high price doesn’t mean that the price has to be paid.
If the customer feels that price is too high, they can walk away. The only reason a customer would consent to paying is because he or she believes the product is worth more than the cash that he is giving up. This is still a voluntary interaction, and price gouging doesn’t force anyone to pay higher prices if they don’t want to.
Supplies are preserved with price gouging
Opponents of price gouging rarely stop to think what would happen if it didn’t take place. If suppliers didn’t raise their prices to conserve their supply, it would lead to shortages and hoarding.
During an emergency, a gas station might be able to ration their supply by raising prices to $10 a gallon. Only those who truly needed gasoline would buy from that station and they would only buy as many gallons as they absolutely needed.
On the other hand, if the station charged $2.50 a gallon, customers would fill their tanks – whether or not they truly needed to – and the station would rapidly run dry.
Price gouging prevents that scenario from taking place and protects precious resources for those who truly need them.
Price gouging creates incentives to increase supply
For every action, there is an equal and opposite reaction. When demand increases, price rises to conserve supply. When prices are high, supply increases to meet demand.
If cases of water bottles are being sold for $40, that creates a profit incentive to bring in more cases. Suppliers will purchase cases of water in other areas and bring them to the emergency zone to make a profit. Then, to incentivize customers to purchase from a new competitor selling the same product, those new suppliers will have to lower prices.
Eventually prices will normalize. Everyone will have been able to purchase the water they need. Price “gouging” has in fact increased supply and created a market that otherwise wouldn’t have existed!
Image via Twitter user Ken Klippenstein.