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IPFS News Link • Free Market

In Defense of "Price Gouging"

• - Daniel Woolley

Some markets are extremely liquid and this price change happens quickly and frequently – for example the price you pay for gasoline. The same station might change its price up or down a few pennies every day. The vast majority of the time supply and demand move in small increments and changes in price are hardly noticeable.

However, there are times when markets are shocked. Hurricanes in FL might increase the demand for plywood while at the same time supply is diminished both in stores and through strained supply chains. This is where well-meaning politicians have often stepped in and enacted laws forcing business to keep prices at the level they were before the shock came. While well-intended, whether by law or a business owner's personal altruism, not raising prices in a time like this can hurt those it was most designed to help.

In the hurricane example, if prices of plywood are allowed to rise, guys with pickup trucks in surrounding states might anticipate the need, buy the surplus in their region, and drive to FL reselling to those who need in. Yes they do this at a profit, sometimes. But, if the market need is misjudged they could end up taking a loss. This is the essence of being an entrepreneur – forecasting market needs and taking a risk to meet them. When the law will not allow businesses to increase the price of plywood, those same "guys with pickup trucks" will simply stay home, and the people most in need of plywood will have to do without, until the inadequate (for the situation) supply chains of existing businesses like Lowes or Home Depot are able to catch up.

But that's not the only consequence. If prices remain low, it signals to consumers that everything is normal. The first ones in line might buy more plywood than their actual need, leaving less for the people who arrive later.

Let's consider a different, perhaps more personal example. The whole nation just experienced this first hand with toilet paper. When stores first began to notice the increased demand for toilet paper they had three options: 1) do nothing, 2) restrict the number of items each customer could buy, or 3) increase the price. Unfortunately, most stores initially chose "do nothing." This led to customers buying more than could satisfy their immediate needs, leaving others without the ability to satisfy their needs.

Now that the shortage has spread beyond toilet paper into other goods like groceries, many stores have begun enforcing #2 – restricting how many items each customer can buy. The conceit of this should be clear after a moment of reflection. It is the same problem that plagues all central planners. How could they possibly know the right number of items to meet the needs of each customer's unique situation? Only the customer could possibly know that. Here's a for instance – Publix grocery stores has instituted a policy of not selling more than 2 of the same item to any one customer. Seems reasonable, right? Yet their policy will allow you to buy 50 quarts of ice cream as long as you select at least 25 different varieties, but will not allow you to get 3 quarts of your favorite triple chocolate truffle variety. Sure, maybe you won't eat all that ice cream in one sitting, but why should it be Publix' decision how much you buy. They are not qualified to judge your unique situation and needs.