Price gouging: it just doesn’t exist
Here’s the most succinct summary of the economics of “price gouging” I’ve ever read. An excerpt:
Suppose a hotel room rented for $79 a night prior to Hurricane Katrina’s devastation. Based on that price, an evacuating family of four might rent two adjoining rooms. When they arrive at the hotel, they find the rooms rent for $200; they decide to make do with one room. In my book, that’s wonderful. The family voluntarily opted to make a room available for another family who had to evacuate or whose home was destroyed. Demagogues will call this price-gouging, but I ask you, which is preferable: a room available at $200 or a room unavailable at $79? Rising prices get people to voluntarily economize on goods and services rendered scarcer by the disaster.
I’ve made a similar argument in the past, but it required a chart showing the relative tiredness of drivers and the assumption (a reasonable one, I think) that hotel rooms will get progressively cheaper as one gets farther from an evacuated area. This one is much simpler.
It seems cruel when a hotel raises its prices just when people in tragic circumstances need the rooms the most. Perversly, though, it’s actually the best thing for all involved. Rising prices help ensure that supply doesn’t run out entirely during the crunch, and high profit margins encourage new suppliers to enter the market as quickly as possible, helping to meet the new demand.
Meanwhile, Hawaii’s gas cap laws may soon start having (how surprising!) adverse effects on supply. Colorado, thank Jebus, has no laws against gouging, and it seems doubtful that any local politicians would seriously suggest capping the price of gas. It’s nice to live in a (somewhat) sane place.
(Links via Matt Welch at Hit and Run)
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I see the point–that capping prices exhausts supplies more quickly, and possibly less evenly or fairly. But in your example, even a 79 dollar hotel room might be a tough or impossible option for a poorer person. 200 is probably out of the question.
So yea, price gouging benefits people who can afford it. To hell with the people who can’t?
In what economic situation are the poor not screwed? The free market can be cruel, but I think it’s the best system we have.