Gouge This

There's been a lot of talk in the news about price gouging and how Congress is investigating. Some Democrat from Washington even wants to make "excessively unconscionable price increases" illegal. Seriously. What does that mean and what good is that going to do?

Our economy is based on supply and demand. He's a simple illustration. I own a generator store. The weather's been great, electricity cheap and in abundant supply, and my 10 generators have been sitting on the shelves for months with a $500 price tag on them. Well, a hurricane comes rumbling through (increased demand). Due to the new anti-gouging laws, I can't adjust my price and on such short notice I'm unable to increase my inventory (flat supply). Someone comes in and buys 1. As the warnings increase and the weather worsens, another customer comes in and buys 2 more. Just in case, he says, as he loads them up. The morning of the storm, 4 more customers come in and between them buy the remaining 7 generators that I have.

I've been unable to regulate my inventory because supply, demand, and price are all out of my control. As a store owner, I can never do much to affect demand. Given notice I can keep a steady supply, but I must use price to balance the two.

That's not the end of the story, though. Others come in desperate need after learning now that the power will be out for days. I have to turn them away empty handed. I have no more generators. Meanwhile the customers that came in and bought 2 generators each are running their TVs and air conditioners all day long. The people without are suffering. If I had been able to adjust my price, perhaps some of the customers that bought 2 generators just because the price allowed them to would have only bought 1. Maybe they'd just be running a refrigerator and a couple of fans. And maybe I would still have had generators on my shelf when the people that I had to turn away came in. Wouldn't they have been happy to pay $700 for my $500 generator?

Here's another scenario. This time my generator store isn't in one of the areas affected by the storm but in a neighboring area. I see the news reports about how people are in desperate need of generators. The new anti-gouging laws prevent me from raising my price though and my price is set to be able to sell the generators from my store. If I could raise the price of my generators to $700 maybe it would be worth it for me to try to deliver them to the storm affected areas. Since my price can't go above $500 though, I just let them sit unused in my store.

I'm sure some people would argue that those scenarios are very unrealistic and would never happen and they aren't good examples and all that. I saw the potential for those stories to unfold first hand when I was in the aftermath of Katrina last year, though. Price gouging laws prevent people from reacting to changing economic conditions around them. It may help some people in that they got a $500 generator for $500 instead of $700 but it hurts people others when a generator isn't still on the shelf. That's not gouging; that's basic economics.