There’s a natural disaster and an emergency on the east coast right now, so of course politicians are scrambling to issue strong denunciations of “price gouging.” Case in point, New Jersey Governor Chris Christie:
Gov. Chris Christie issued a forceful reminder to merchants: Price gouging during a state of emergency is illegal; will be investigated by the Attorney General and Division of Consumer Affairs; and will result in significant penalties.
“During emergencies, New Jerseyans should look out for each other — not seek to take advantage of each other,” the governor said. “The State Division of Consumer Affairs will look closely at any and all complaints about alleged price gouging. Anyone found to have violated the law will face significant penalties.”
The problem with this is that it completely undermines the market’s ability to maintain steady supplies through price rationing.
We’re all more than happy to take advantage of lower prices when dropping demand, or expanding supply, makes a given product cheaper. Yet when conditions change to contract supply, or if demand suddenly skyrockets, we make the corresponding price hikes illegal?
That’s not how markets work.
If prices aren’t allowed to reflect the realities of supply and demand, then the market cannot function to continue providing adequate supply. For instance, stores that quickly ran out of things like bottled water, canned goods or gasoline during this east coast emergency might have seen their supplies last longer, and be distributed to a larger number of customers, had they been allowed to adjust prices accordingly.
Sure, customers pay dramatically higher prices in the short term, but we’re also talking about more gasoline, more bottled water and more canned food available for everyone instead of supplies running short after a smaller number of customers stockpile thanks to lower prices.
When we talk about price gouging we talk about retailers taking advantage of customers. But when laws are implemented prohibiting retailers from changing their prices in response to changes in supply and demand, who is taking advantage of who?
Communities would be better served if, in times of disaster, retailers were allowed to raise their prices.