Why so called “price-gouging” is necessary during natural disasters


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Broken Gas stationThere is a lot of material floating around the web related to the fact that prices of water and other necessary goods such as gasoline are flying way up to absurd levels in areas where hurricanes cause a state of emergency. Cases of water are reportedly selling for $99 in some areas. People are furious about the situation, claiming greedy business are committing evil price-gouging. They see it as businesses taking advantage of people in need. This warrants a brief lesson in economics, so that we can understand why unbelievably high price increases are a good and necessary thing.

First of all, what are prices? Are the arbitrarily set by businesses? To answer this question, we must first understand why an economy exists in the first place. Economies exist because there is a scarcity of resources. Simply put, there is less stuff to go around than there are people who want the stuff. For example, why are beach houses so expensive? Well, it’s because there are less beach properties than there are people who want to live on the beach. The supply is lower than the demand, and that drives prices up. Imagine if the government set price limits on beach houses, and declared it a basic human right that we get to have a beach house; does that change the fact that there are fewer beach houses than there are people who want to live there? Of course not! It would still be the case that there are not enough beach properties for everyone who wants one to have one. If the prices were artificially lowered by the government, then rationing would have to occur. How do they decide who gets what? Does a government bureaucrat get to decide who is worth living in a beach house and who isn’t? High prices of beach houses are a reflection of the fact that the demand is high, and supply is limited.

It is also very important to understand that each resource has many possible uses. For example, trees can be used for wood for building houses, but they can also be used for paper, and for furniture. So, how do we know how much of this resource should go to each of these uses? Maybe a central planner(s) would know, like in socialism. The problem with that is that with millions of transactions and changing needs, it would be impossible for any individual, or even the collective group of all individuals, to be able to accurately coordinate where that resource is most needed. Some areas may be building a new neighborhood, and have a need for a high amount of wood, but then upon completion, there is no longer a demand in that region. Now imagine 50 million different instances of that kind of changing demand for that resource. Compound that with the millions of different products, all demanding the use of resources, and you’ll easily see that it is impossible for anyone to track how much of what needs to go where.

That is the beauty of prices. Prices are what dictates how much of each resource goes where. A lumber supplier in a region does not know the individual needs of everyone living in a region, but rather only knows what amount of their product people are trying to buy. Since there are a limited number of trees, and it’s in the lumber supplier’s best Lumberinterest to sell as much as he can while still having a long-term sustainable business, when demand goes up, prices go up. If lots of building projects have suddenly began in a particular region, there would be a larger demand for lumber there. When there is a larger demand, lumber suppliers raise prices, because they have the same supply of trees but now more people want them. When the demand goes up, they will profit more with increased prices, so they raise the price of lumber. What effect does that have? Well, the price of wood goes up for everybody when demand increases. Paper becomes more expensive, furniture becomes more expensive, and any other product that uses lumber also increases in price. If the increase in prices causes people to not purchase as much furniture, then the demand for furniture goes down, and fewer lumber resources are allocated to those products. This is how prices and demand cause resources to go to where they are most needed. Those areas with the higher demand will be able to afford the cost increases, and since they want to make as much of a profit as they can, they will buy as much of that resource as the consumers demand. To summarize this, prices are a reflection of scarcity and demand, and when demand goes up, prices go up, which forces the scarce resource to be allocated to the areas where there is the highest need for it.

As a side note, keep in mind that related to scarcity & demand, is competition. If a consumer would be willing to purchase a product at $25, that doesn’t mean a business can charge that much, because a competitor might be able to sell it for $15. Whoever has the lowest prices, will have the consumers buying their product, making them more money. That’s why competition drives prices down.

Now, how does all this relate to the prices of necessary supplies in disaster zones? Well, the reason that the water costs $99 per pack, is because there is less water available than is demanded, and water has alternative uses. As demand goes up, prices go up. There is a scarcity of resources in disaster zones, and so it is physically impossible to distribute what few resources are available to everyone who wants them. This is true of the water, the gas, the food, and all other resources that are in high demand but low supply.

If there were price controls on the water, forcing the businesses to keep prices low, then the first individual who got access to it would purchase all of the water, and there would be none left for everyone else. People would take far more than they needed. That is a problem, because lowering the prices cannot change the fact that there is a limited amount of water. The high prices are a reflection of the fact that it is a highly scarce resource, and simply not enough exists in the area to go around to all the people who want it.

What about rationing water? Could we make it law to keep the price low, while only allowing each person to buy only one pack? First of all, such a policy would be impossible to enforce. People have a strong incentive to go around to every venue they can and buy all the water they can. If you tried to combat that by only supplying water from one controlled, highly monitored source, then not only have you made things incredibly inefficient, but you’ve also made water completely inaccessible to most individuals. Not only that, but rationing like that means that the water is not being allocated where it is most needed. Remember how the role of prices worked in the case of lumber? When prices go up, lumber goes where it is needed most. That principle applies to all things, and all the scarce resources in disaster zones respond to supply and demand in the same way as everything else.

water-19659_640So, I’ve gone over why the price of water went up, and why it is necessary, but now I want to explain why that is a wonderful thing! People always complain how businesses are greedy (interesting how it’s always everyone else who’s greedy, but never ourselves), well guess what greedy business want? Profit. What is more profitable then selling water, gasoline, milk, and all other resources where the demand is so unbelievably high? There is a massive incentive for businesses to start selling to those people as soon as they can! Every supplier is in fierce competition to do everything they can to get those resources in the region. They will be driving through the night and putting everything then can to the region in order to tap into the market. The desire for profit means that these businesses will be doing everything in their power to get resources to the people as fast as they can. This means that more water and other necessary resources will be brought to the people who need it as quickly and efficiently as possible. The supply of each of the scarce resources is going to increase. As the supply increases, and the demand remains the same, prices decrease. Everything becomes cheaper again as a reflection of the change in scarcity.

To summarize all of this: high prices in disaster zones are a reflection of resources being scarce, not arbitrarily set by greed, and the increase in prices is good because it incentivizes suppliers to get as many of those resources to the region as fast as they can.

 

Author: Ryan Scarbel

Ryan Scarbel is the founder and Executive Director of Free the Campus, Inc. Ryan is a student at University of North Carolina at Greensboro, who's passion is to promote free speech and challenge all ideas in search of truth.

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