By Theresa Camoriano
I was disappointed to see that Governor Bevin, in the wake of a snow storm, has issued an emergency order against price gouging. That may be the politically expedient thing to do, and it may be that Governor Bevin does not think this is a battle worth fighting, but the reality is that the victims of an emergency situation would be better off if price gouging were allowed.
That sounds cruel and heartless, doesn’t it? Actually, it is just the opposite.
What politicians and activists call “price gouging” is just the market reacting to a sudden scarcity caused by the emergency. When people desperately need a certain product, they are willing to pay more for it. This creates an incentive for suppliers to meet the sudden increase in demand in order to meet that desperate need.
For example, in the event of an emergency that involves a power outage, people desperately need generators. If the price of generators remains the same as it would be under normal conditions, the existing supply will be sold out immediately. The people who were not lucky enough to get their hands on those few existing generators may incur substantial losses as the food in their freezers and refrigerators spoils, or they may not be able to heat their homes. Those people would be very happy to pay a higher than normal price for a generator in order to meet their immediate needs.
What incentive would businesses have to ship in a large supply of generators to meet the sudden need? Consider that the businesses must incur increased shipping charges, and they must take the risk that the power will be restored very quickly, leaving them with a large inventory of generators that they cannot sell. Clearly, the businesses need an incentive to rush in a large supply of generators to meet the increased need, and that incentive is the ability to charge more for the product than would be charged under normal conditions.
You may call it “price gouging” or “windfall profits”, or you may call it the law of supply and demand. It does not matter what you call it. The fact is that an increase in the price is the best way to ensure that scarce products will be made available to the people who desperately need them.
Economics Professor Walter Williams gives an example of the need for hotel rooms in an emergency situation like Hurricane Katrina. He says, “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 have great respect for Governor Bevin and believe he is doing his best to serve the people of Kentucky. One of the best things he could do would be to encourage everyone to face the economic realities of life, because living in accordance with those realities will produce the most favorable outcomes for everyone.
Below are links to some articles by Economics Professor Walter Williams:
(Theresa Camoriano is a patent attorney in Louisville KY.)
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