Thursday, October 11, 2007

Price Gouging is a Good Thing

Last weekend we took the kids to San Francisco to see the Blue Angels perform as part of Fleet Week. The kids loved it, but that's not my story. The real story is the fact that many other folks had the same idea and the city was packed with would be spectators. So much so that parking was a nightmare. Parking lots that normally charge $10 now charged $40 and they too were quickly filled to capacity. Even if I were willing to pay that huge amount, finding a spot would not have been possible. Consequently, I dropped off the wife and kids close to Pier 39 and drove around for about an hour, until I found somewhere to abandon the car.

Let me get to the point here - and my point is not going to be a popular one. Do you know how after a natural disaster hits everyone starts complaining about price gouging, law suits start flying and everyone gets on their high horse? Well, so called "price gouging" is just a natural market reaction to a shortage in supply. The price mechanics are very similar to the ones we experienced last weekend in San Francisco. When demand for a previously abundant resource shoots up dramatically, and new supplies are not available, price spikes. In the case of our parking situation, parking spiked by 400%. That's a good thing.

Why are price spikes a good thing? They mean that the free market is operating correctly. The laws of supply and demand dictate that an increase in demand without an offsetting increase in supply leads to an increase in price. The alternative to allowing a price spike is to institute rationing. Both of these are acceptable systems in a crisis, but a price spike offers the added benefit of encouraging new supplies to come online. Price spikes also ensure that the people that end up getting a given resource, are the ones who value it the most, not the ones that happen to be standing first in line. Rationing is a surefire way to guarantee the development of a black market. Those individuals who received a ration for a price that is lower than the true economic value of the resource, will simply re-sell that resource for a higher price on the black market.

Rather than complain that vendors are price gouging, consumers and the government need to plan in advance to ensure an adequate supply of all necessary commodities, or to prepare adequate substitutes for those resources. In our case, I did not have to pay $40 for parking. I had several options: (i) not go; (ii) take the train instead of the car (which is what we should have done); (iii) substitute time for money by driving around until I finally found a spot. All three were valid options. Railing against price gouging was not one of them.

3 comments:

Traciatim said...

Price Gouging and fluctuations due to demand are VERY different things. Price Gouging is the act of jacking up prices when no other options are available, and efficient pricing is the prediction of a demand and adjusting prices accordingly.

There is a huge difference between charging $7000 for a 2500watt generator that regularly goes for $999 during a week long power outage in a severe winter storm than there is charging $600.00 for a $79.00 hotel room around the superbowl.

Shadox said...

No. There is no difference. That's exactly the point I am making. If there were other generators available, the price of said 250W generator would not have spiked. Once again, it's supply and demand.

Just because it's a generator rather than a sporting event ticket, the hard as a rock truth of supply and demand does not change.

Ben Hughes said...

@Traciatim:

The only difference is the degree to which you rely on emotion over economic logic, and clearly you've chosen the former.

In this case like all others, price is only a signaling mechanism reflecting the underlying reality of some scarcity. Disallowing the price to fluctuate with supply and demand (laws which do not abate just because some politician or offended voter decides they don't like them) merely leaves non-price rationing which for a whole slew of reasons is dramatically inferior.

Some people feel good blaming the messenger, and that's all a price is.