by Kristin Knepper
I’m not a
seasoned economist, but I know enough to become furious when news outlets report on the cruelty of price gouging.
With the recent snow storm that dumped more than two feet of snow throughout
the east coast, price gouging has been reported by the Associated Press. News
sources claim that businesses related to natural disasters (lumber and building
supplies, technology such as generators, etc) have been unreasonably and
unnecessarily raising prices on goods they know consumers need. What these news
outlets need is a simple lesson on the law of supply and demand.
Ready kids? OK.
When the quantity demanded for a product goes up, and
the supply is constant, the price must go up.
I repeat, when the demand increases, the price
increases. Price is equal to value.
When people value something more, the price reflects that increase in value. My
favorite article on this subject, titled “Price Gouging Doesn’t Exist, And
You’re An Idiot”, explains:
Here’s the problem. A customer who’s worrying
about Hurricane Sandy goes into Office Depot[to buy water], happens to be the first one in
the door, sees the $5 price, and immediately buys the entire display of 100
packs. Can’t be too careful, right? It’s an emergency! $500 might be a bargain
if there’s no water available for weeks.
And now, no one else can buy water. It’s all
gone.
So the retailer sets a limit. 5 packs per
customer, whatever. So instead of all but 1 person going without bottled water,
now, all but 20 do.
But knowing that there’s going to be increased
demand for bottled water, what if Office Depot were to quadruple its price?
When a case costs $20, people start thinking.
- Do
I really need all this
water?
- Could
I economize, maybe get along with as few bottles as possible?
So here, price is an
incentive. If you raise the price during a disaster, consumers will have the incentive
to buy less, or buy what they need. That leaves more for other consumers or the
ones who really need it.
Another example from
Dr. Boudreaux’s microeconomics class (Econ
102, come on Associated Press) is the example of Hurricane Katrina. During
and after Hurricane Katrina, the price of lumber rose dramatically because
everything had to be rebuilt. This helped accomplish two things. The first is
that only the people who really needed lumber bought it. Those with minor
damage thought “well my damages can wait until the price lowers to fix it”. The
people with major damages said “well I have to fix this now so I have to pay
that price”. The second effect was creating an incentive from lumbers’ in nearby
states to enter the market. Lumber yards in Georgia, Alabama, and Northern
Louisiana brought lumber to sell at the higher price. This created more supply,
which was great for those in need!
Now flip the coin. The
government enacts “anti-gouging” laws. Everybody buys lumber, even the man with
the silly minor damage to his front door because, hey, the price is the same
pre-disaster. The lumbers’ from the nearby states don’t sell in the disaster
market because there’s no price raise and therefore no incentive for the extra
profit.
There’s no more lumber
in the market, because the price did not reflect the scarcity, nor did it
create an incentive for the people. Or there is lumber, but because the
government-enforced price does not fit the value, a black market is created.
Let me tell you, that black market price will be far more than the price it
would have been if the price ceiling weren’t enacted.
In conclusion; my
message to the Associated Press: Stop reporting on price gouging! It is
tricking consumers into believing that “big business” is using tragedy to take
advantage of consumers. This is a complete fallacy. The rise in price is merely
a reflection of scarcity and a natural process of reaching equilibrium between supply and demand.
Works Cited:
"Price Gouging
Doesn't Exist, And You're An Idiot." Control Your Cash: Making Money
Make Sense. N.p., 2 Nov. 2012. Web. 01 Feb. 2016.
Picture source: http://shsapeconomics.blogspot.com/2012/11/price-gouging.html
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