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What’s the Opposite of Price Gouging?

Summary:
Yesterday I spent the morning with The Fund for American Studies president, and my long-time friend, Roger Ream and his wife, Mary Kay.  Over coffee we touched briefly on so-called “price gouging.”  Roger had an insight that I’d never before encountered.  Roger asked: “What about the many merchants who lose consumer demand as a result of natural disasters?  Where’s the criticism of the consumers who greedily and suddenly ‘force’ those merchants to lower their prices, perhaps in some cases all the way to zero?  Where’s the outrage?” Roger’s point is excellent.  While natural disasters cause the demand for many goods and services to rise (and, simultaneously, also cause the supplies of these goods and services to fall), every geographic area struck by a hurricane or other natural

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Yesterday I spent the morning with The Fund for American Studies president, and my long-time friend, Roger Ream and his wife, Mary Kay.  Over coffee we touched briefly on so-called “price gouging.”  Roger had an insight that I’d never before encountered.  Roger asked: “What about the many merchants who lose consumer demand as a result of natural disasters?  Where’s the criticism of the consumers who greedily and suddenly ‘force’ those merchants to lower their prices, perhaps in some cases all the way to zero?  Where’s the outrage?”

Roger’s point is excellent.  While natural disasters cause the demand for many goods and services to rise (and, simultaneously, also cause the supplies of these goods and services to fall), every geographic area struck by a hurricane or other natural disaster also has within it markets for some goods and services in which demand collapses because of the natural disaster.  Consider, for example, a movie theater that suffers no physical damage because of the disaster.  With residents of the stricken area dealing with the natural disaster, many fewer residents go to this theater than would go in the absence of the natural disaster.  Perhaps so few people go to the theater that the theater owner simply shuts down for several days, earning during those days $0 revenue per seat even though a mere week earlier that owner expected to earn $11 per seat on the sale of many seats.  Where’s the outrage at the greediness of movie goers who now refuse to pay $11 per seat to watch movies a this theater?

Or perhaps the theater keeps operating, but for several days following the natural disaster discovers – because the demand for watching movies has fallen significantly – that its profit-maximizing price-per-seat is $2 rather than $11.  Is each consumer who pays $2 (rather than $11) to watch movies at this theater doing whatever the mirror-image of ‘price gouging’ might be called?  Should government legislate that any consumer will be fined or even jailed if he or she is caught, in the wake of a natural disaster, paying prices substantially lower than were the prices that consumers paid before the natural disaster struck?

The point is germane: if in the wake of natural disasters government penalizes merchants for exchanging goods and services at unusually high prices voluntarily paid by consumers, that same government should also penalize consumers for exchanging goods and services at unusually low prices voluntarily accepted by merchants.  And in both cases the self-important government officials can go on television and radio and denounce the “greed” that, in their economically uninformed opinions, “cause” these prices to differ greatly from these prices’ pre-natural-disaster levels.

Admittedly, in reality the incidence of prices made unusually low by natural disasters is much less than of prices made unusually high.  Natural disasters are spectacularly good at destroying supplies and disrupting supply lines.  But it is not difficult to think of plausible examples of goods and services the demands for which fall so far, and the supplies of which are relatively unaffected, because of natural disasters that the disaster-induced market-clearing prices of these goods and services fall far below their ‘regular’ levels.

One real-world example that just occurs to me is tour-guides on Key West.  I heard several days ago on the radio a Key West tour guide interviewed.  This tour guide expressed worry that, because of the damage caused by hurricane Irma, he’ll not be back to full-time work for several months.  Should consumers be fined for greedily not now purchasing this tour-guide’s services in quantities and at prices that they would have agreed to had not Irma struck south Florida?

Here’s another plausible example from Roger, one that he sent to me by e-mail:

Prior to a storm, there are no doubt vendors of perishable goods who cut prices to reduce their inventories and minimize subsequent losses.

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Don Boudreaux
He is a professor of economics at George Mason University in Fairfax, Virginia. Previously, he was president of the Foundation for Economic Education.

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