Political Wednesday – Price Gouging Saves Lives

That frat-boy of a bully, New Jersey Governor Chris Christie, issued warnings against price gouging to merchants in the aftermath of this Hurricane Sandy:

“During emergencies, New Jerseyans should look out for each other — not seek to take advantage of each other.”

A Lesson On Prices

Gov. Christie needs to learn something about economics. Prices are the most critical aspect of a functioning economy. Absent distortions like government-induced inflation (aka “money printing, aka counterfeiting), government-induced shortages or surpluses through legal price controls – the fluctuation of prices represents the fluctuations of actual supply and demand. “Price gouging” or “profiteering” occurs in times when the demand curve changes dramatically due to some errant event, like a natural disaster.

It is true, always and forever, that merchants will try to charge as high a price for their goods and services as competition and demand allow. But high prices draw rapid competition from other merchants who smell a killing to be made, which causes increased supply to meet the crazy demand, which then dampens prices, etc. etc. world without end. But this process is rarely too extreme, since markets emerge relatively slowly, allowing competition to keep that damper on prices pretty constant. Supply and demand track each other well, and a “market-clearing” price settles into a range and doesn’t poke out of it.

When disasters like this Hurricane cause drinking water, bread, gas and other goods to be in short supply, we have a sudden change in the normal equilibrium. People’s demand meanwhile hasn’t had time to adjust, and shouldn’t bother adjusting since everyone knows its a temporary shortage. The natural response from merchants is to charge more for these goods. Merchants are trying to get the best profit for sure – but their high prices are also critical signals to consumers that these items are scarce and should be conserved once bought.

High prices are also critical signals to other potential entrepreneurs who would seek to respond to this sudden demand by aggressively importing the scarce goods for sale to areas in need. Sure, they’re only after profit too, but its clear that profit in a free system comes from giving consumers what they demand. In times of disaster, people demand the basics to survive. A profit-motivated merchant will always trump be the most rapid “1st responder” to troubled people.

If Gov. Christie has his way, merchants would be put in jail for exercising their rights to voluntarily transact with consumers. Goods would sell out immediately since, just at the time that these goods become scarce, demand sky-rockets while the price is held down by force of government decree. This is a recipe for panic, shortage, pain, and potentially death.

For every single complaining consumer who prompts the Christies of the world to slap down their little iron fist like this on free voluntary commerce, there are thousands who consciously or unconsciously know that a free price system means stability and safety, even in a time of disaster.