Tuesday, October 30, 2012

Is price gouging evil?

A really nice article about how price gouging in extreme situations plays an important social role. (And making price gouging illegal does the opposite.)

Simply put, price gouging separates luxuries from necessities. imagine someone raises the price for a bag of ice from $4 to $15. Now, the first few lucky people coming into the store aren't going to buy up 10 bags each (leaving the rest of the people who need bags with empty hands). They will think: 'Do we really need so many bags?'

Even for each individual bag, each person will ask: 'Do I simply need it as a luxury, or do I have something really important I am trying to keep on ice?'

The people for whom it's really important will pay the $15 for a bag. The people for whom it's merely a luxury (e.g., they want to have some vodka on the rocks while they are waiting the storm out) will mumble something about those 'damn capitalist pigs' and go away.

This way the resources are 'rationed' appropriately throughout the society.

As the article mentions, it may be that a given store may set the price too high or too low. Well, that's why there is competition on the market. The stores that set their prices too high will have bags left over (since people will go to their competitors), and people who set their prices too low will be quickly sold out, not getting the 'right' amount of the capital for the merchandise.

If you're interested, read on: 'Price Gouging Saves Lives in a Hurricane'.

On a related topic, if you want to know how speculation can play a positive role in the society, watch this video by Bob Murphy:

P.S. By the way, the fact that New Jersey's governor made a warning against price gouging shows once again that though the Conservatives may talk about being friends of the free market, they are not. And they are as ignorant of how free markets work as the Liberals.

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