How Price Gouging Saves Lives

With the recent storms that hit the eastern coast of the United States there has been some talk regarding price gouging. People get up in arms when store owners jack of their prices during a natural disaster. Those who lack an understanding of economics claim that price gouging is immoral and should be stopped. The truth is that price gouging is actually beneficial and can save lives:

Let us postulate that a small Orlando drug store has ten bags of ice in stock that, prior to the storm, it had been selling for $4.39 a bag. Of this stock it could normally expect to sell one or two bags a day. In the wake of Hurricane Charley, however, ten local residents show up at the store over the course of a day to buy ice. Most want to buy more than one bag.

So what happens? If the price is kept at $4.39 a bag because the drugstore owner fears the wrath of State Attorney General Charlie Crist and the finger wagging of local news anchors, the first five people who want to buy ice might obtain the entire stock. The first person buys one bag, the second person buys four bags, the third buys two bags, the fourth buys two bags, and the fifth buys one bag. The last five people get no ice. Yet one or more of the last five applicants may need the ice more desperately than any of the first five.

But suppose the store owner is operating in an unhampered market. Realizing that many more people than usual will now demand ice, and also realizing that with supply lines temporarily severed it will be difficult or impossible to bring in new supplies of ice for at least several days, he resorts to the expedient of raising the price to, say, $15.39 a bag.

Now customers will act more economically with respect to the available supply. Now, the person who has $60 in his wallet, and who had been willing to pay $17 to buy four bags of ice, may be willing to pay for only one or two bags of ice (because he needs the balance of his ready cash for other immediate needs). Some of the persons seeking ice may decide that they have a large enough reserve of canned food in their homes that they don’t need to worry about preserving the one pound of ground beef in their freezer. They may forgo the purchase of ice altogether, even if they can “afford” it in the sense that they have $20 bills in their wallets. Meanwhile, the stragglers who in the first scenario lacked any opportunity to purchase ice will now be able to.

Increasing prices of goods during natural disasters encourages conservation, which increases the chances that those goods will be available to those who need them. Jacking the price up encourages those who aren’t in critical need of a good to go without whereas those who separately need a good have access. Using the above example of ice, somebody wanting to keep beer cold may be unwilling to spend $15.39 to buy a bag of ice whereas the diabetic needing ice to keep their insuline cold will be more than happy to spend $15.39 on a bag of ice and will likely be grateful that the price increase ensured ice was available.

One thought on “How Price Gouging Saves Lives”

  1. I recall a story during Katrina of a “profiteer” who spent his savings on renting a truck and buying a bunch of generators at retail prices. He drove down to Louisiana and had the unmitigated gall to sell those generators at a substantial profit.

    As far as I could tell, none of the people complaining about his evil behavior had risked their own money to transport generators and sell them at an acceptably small profit. Apparently it would better that people desperate enough to pay twice the ordinary price be denied that opportunity.

    (end sarcasm)

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