As you can imagine, the topic of "price gouging" is rather huge over in Southwest Florida right now. Tensions are high, which means this probably isn't the best time to make a case in support of it. But here goes anyway.
So-called "price gouging" is an easy issue for politicians, which is why Florida's attorney general, Charlie Crist, was on the radio yesterday nearly apoplectic because someone had been charged $75 for a hotel room that was supposed to cost $44. He gets to make a speech that everyone (except the hotel operator) agrees with, and everyone's a winner. Right?
Now I'm not foolish enough to go on record favoring $10,000 chainsaws in disaster areas. The entire concept of the free market rests on voluntary exchange, and a case can be made that some extreme forms of gouging are essentially coercion. If your shirt is on fire and someone offers to sell you a bottle of water for $1000, that's hardly a voluntary exchange. Still, I believe a case can be made that price hikes in general, even in difficult situations, can serve a valuable purpose.
It's simply a matter of understanding what prices are about. The common mindset (especially in, but not limited to, the Democratic Party) sees "price" as the way the producer of a good or service exploits the consumer. When my kids were little, they felt that "ice cream should be free"--the price of ice cream was merely an arbitrary impediment placed between them and the thing they wanted.
But in reality, the function of prices is to allocate resources. Higher prices during a shortage mean more general availability of resources. When prices are not allowed to reflect the high demand and low supply of a resource, artificial shortages result.
For example, after a hurricane, hammers are suddenly at a premium. The hammer that was valued at, say, $8 in normal times is suddenly in much higher demand. If the price is allowed to rise to reflect that demand, people will have to make certain decisions about how to spend their money. Do we buy two $20 hammers, or do we buy only one and use the other $20 for something else we need, like shovels and water?
But if the price is forced to remain the same despite the much higher demand (which is currently state law in Florida), such decisions don't have to be made. Suddenly an $8 hammer seems like a tremendous bargain. Instead of being able to buy two hammers for $40, I can buy five of them for that much. So I do. And so does the guy after me. And very quickly, all the hammers are gone.
Once the hammers are gone, some unscrupulous people with extras begin selling them out on the street where the price gouging laws aren't so enforceable. The same hammer that by law couldn't be sold for $20 now goes for $50 or $100 out on the black market.
Or, for example, if I have a family of four, we might seek shelter after the hurricane by all crowding into one $75 per night hotel room. But if the rooms are still only $44, that's suddenly quite a bargain. Maybe we'll get two rooms and spread out a little bit. Then when grandma shows up for shelter all the rooms are gone because they were renting at such a bargain price, and she sleeps in her car.
Allowing the market to determine the prices generally allows for a much more even distribution of limited resources. Three or four neighbors chip in to buy a chainsaw or a generator together rather than each buying his own. That leaves three more chainsaws or generators for the general public to buy. The guy who needs plywood more than he needs glass is forced to choose one or the other because of the higher prices, and the glass is left for the guy who needs glass more than he needs plywood. The extra supply resulting from such choosing keeps the prices lower than they would be on the black market.
It's an argument that will never win because it's too easy for people to be outraged at doubly-priced plywood and roofing paper and it's too easy for politicians to score easy points railing against it. But if the market were allowed more freedom, there'd generally be a lot more plywood and roofing paper available for those who really need them than there is under the current disaster price-fixing system.