Why Price Gouging Isn’t Always A Bad Thing

When natural disasters strike there’s always a lot of hand-wringing about price gouging from retailers, but the truth is that price gouging is a natural function of the market that keeps stuff like this from happening:

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Supermarkets throughout the New Orleans area clear their shelves of perishable food items as Hurricane Gustav continues its approach towards Louisiana on Saturday.

Those supermarkets that are running out of products no doubt kept their prices at regular levels lest they invoke the wrath of some pandering, marauding politician who would slap them with lawsuits and/or punitive legislation. But the simple fact is that these stores might not have run out of product so quickly, and might have been able to provide a lot more customers with the products they need, if they had been allowed to adjust prices in the face of spiking demand.
Think about it for a moment. No store is going to raise their prices so high that they won’t sell anything. Instead, most retailers will simply seek to maximize profits. Which means selling the maximum amount of volume at the highest possible margin. Economics 101 tells us that when demand goes up prices should go up too for good reasons.
First, high prices force conservation. Instead of a handful of rich customers buying up more than they need, so that people who come later or who can’t afford to buy in such volume are left with little or nothing to choose from, higher prices force conservation so that there’s more for everybody.
Second, customers aren’t the only people who run into shortages during natural disasters. In order to keep shelves full stores must bring in new product from elsewhere, and in the midst of a disaster such transport costs can skyrocket. Since empty stores don’t do anyone any good, allowing stores to take more in profits in order to deal with the increased expense involved with keeping the shelves full just makes sense.
Sadly, far too few people are willing to look at this issue objective. Instead, they get angry at higher prices and demand punitive action from the government. And, as with most government action, that punitive action just exacerbates the problem.

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