Suppose a hurricane hits your town and knocks out power. No power means no refrigeration, and no refrigeration means no ice.
Of course, there’s still some ice left from before the storm, and some of it is in the hands of merchants who are willing to sell it – for a price. Prior to the storm, these merchants were selling ice for $2 a bag. But now they’re asking for $12.
Should the law prevent them from doing this? Should “price gouging” be illegal?
I’ve written on this issue before, and believe that a very strong case can be made that price gouging should not be illegal. But, over and over again, I run into people who reject this conclusion because they believe that price gouging is bad for the poor.
And I can see why someone might think this. If you’ve got a fixed quantity of ice, and you’re trying to decide how to distribute it, dishing it out according to willingness and ability to pay (which is really all that “price gouging” amounts to, stripped of the pejorative language) seems like it’s got to be worse for the poor than just about any alternative method of distribution. Like, for instance, keeping the price constant and distributing on a first-come, first-served basis. If ice goes to whoever can pay the most for it, then the rich will get all the ice and the poor will get none. Right?
First, think about how distributions work outside of disaster economies. Lots of things are distributed on the basis of willingness to pay in the world we live in – hamburgers, cars, baseball tickets. But of course it’s not true that the rich get all the hamburgers and the rest of us get none. That doesn’t surprise anyone, because it’s part of our everyday experience. But suppose that government was in charge of producing all the hamburgers and distributing them equally, and then somebody proposed producing and distributing them according to willingness and ability to pay. I bet a lot of people would have precisely the same worry about hamburgers as they do about disaster goods. But they would be wrong. Is there any reason to think that they’re not wrong about price gouging?
Second, the main reason they’re wrong is that they have a static rather than a dynamic understanding of competition. If the real world really was just like a large number of people competing over a fixed quantity of ice, then there would be some reason to believe that the rich will get what they want and the poor will have to do without (though more on this below). But this is emphatically not what real world markets are like. In the real world, the quantity of ice available for purchase is not fixed. It is a variable. And it is a variable that depends crucially on the profit that sellers expect they will be able to reap from bringing the ice to market. All else being equal, the higher the price, the higher the profit, and the greater the incentive sellers have to bring ice from where they can buy it cheap (say, two towns over where the power is on), to where they can sell it dearly. That means more ice available for those who need it most – including the poor.
Third, allocation according to willingness to pay doesn’t necessarily favor the rich over the poor. It favors those who are willing and able to pay over those who aren’t. The extent to which those latter categories overlap with the former is, I think, an empirical question, that depends on how the prices of goods compare with the absolute budget constraints of the poor (even most fairly poor individuals can afford $12 for a bag of ice, in absolute terms), how elastic demand for the good is, and so on. If the high price of ice dissuades some relatively rich people from buying ice to keep their beer cold, and keeps it available for some relatively poor people to buy for some more vital purpose – say, keeping their diabetic child’s insulin cold – then high prices will have benefitted, not hurt, these particular poor persons.
Fourth and finally, remember what anti-gouging laws do: they bring the coercive force of the law in between two persons who want to engage in a voluntary, informed, exchange. That exchange is one that both of the parties think will make them better off (otherwise, why would they enter into it?), and it is one that doesn’t have any obvious negative external effects on third parties. Even if we grant that, on net, “the poor” as a group would be better off if price gouging was prohibited, some poor people would be made worse off by being prevented from entering into this kind of voluntary exchange (and other poor people will be made worse off by the fact that artificially low prices meant no more goods on the shelf by the time they showed up). What business does the law have using its coercive power this way? You don’t have to be a hard-core libertarian by any stretch of the imagination to think there’s something wrong with using the coercive force of the law to stop people from entering into exchanges that make all involved parties better off – including one party who might be in desperate need of being made better off – and nobody worse off.
Here’s my short video on price gouging from Learn Liberty: