San Diego Union Tribune

Price gouging in a free market

By Matt Zwolinski
September 18, 2008

As Hurricane Ike wreaked its devastation this past weekend, governors across the affected region sent out a warning to those who might see this disaster as an opportunity for profit. Price gouging, Gov. Charlie Crist of Florida warned, is an “unconscionable” practice. And those who engaged in it would be vigorously prosecuted under Florida's anti-gouging statute.

Florida is not alone in prohibiting price gouging. Well over half the states have laws that prohibit the practice of sharply increasing prices on necessary goods such as ice, generators or hotel rooms in the wake of a disaster. Merchants who violate these laws can be subject to civil penalties or, in extreme cases, criminal sanction.

But these laws are a mistake. They are a mistake because price gougers, as morally repugnant as they we may find them, are doing something that provides real aid to people in desperate need.

Consider John Shepperson, a Kentucky resident who bought 19 electrical generators and drove 600 miles to Mississippi in a rented U-Haul after Hurricane Katrina. There, he planned to sell his generators for twice what he paid for them. In so doing, he would have provided his customers with a tremendous benefit. Sure, they would liked to have paid much less for the generators, but the fact that they were willing to pay Shepperson's price shows they would rather be “gouged” than not have the generator at all.

Unfortunately, Shepperson was arrested for violating Mississippi's anti-gouging law and his generators were confiscated. This was bad news for Shepperson, of course, but the real problem with such laws is their effect on disaster victims. These are people who have already lost more than anyone should have to bear to the capriciousness of nature. Their homes are often wrecked, their jobs might be in jeopardy, the safety of their family is often seriously compromised, and their opportunities to do anything to make their situation better are severely limited. The way to help such people is certainly not to take away the one option they see as more promising than anything else they've got. Yet, this is precisely what anti-gouging laws do.

This is why all state anti-gouging laws should be repealed. Instead, the law should allow prices to rise freely in the wake of a disaster. This may seem callous and cold, but there are two reasons why such a policy would dramatically improve the condition of disaster victims.

First, allowing the price of necessary goods to rise in the wake of a disaster would help ensure that scarce goods go to those who need them most. Take hotels as an example. A family whose home is destroyed, and who has no friends or neighbors with whom they can stay has a very great need for a hotel room. A family whose home is only moderately damaged and who could – if they had to – crowd in with a neighbor has a lesser need. If the price of hotel rooms is kept artificially low by anti-gouging laws, both families might be willing to pay for a hotel room. Allowing prices to rise freely provides those who have alternative places to stay with an incentive to use them, and conserves scarce rooms for those who need them most and are therefore willing to pay the increased cost.

Second, allowing prices to rise freely provides a financial incentive for people living outside the disaster area to bring vital goods and services to where they are needed most. Of course, it would be nice if people brought goods and services to disaster-struck areas out of the goodness of the hearts, and our country has always been blessed with an amazing number of people who are willing to do so. But it's still the case that the surest way to get people to do something is to make it in their own self-interest. The first sellers who come would manage to reap unusually large profits due to the lack of competition. But as those large profits lure more and more sellers in, the increase in supply would cause prices to decline, and disaster victims would be able to meet their needs more and more cheaply.

We object to price gouging, I suspect, because we don't want to see the vulnerable taken advantage of, and perhaps because we think the practice will exacerbate existing economic inequalities. But banning price gouging is not the right way to address these problems.

If we want to ensure that goods are distributed equally, then local governments should purchase goods from price gougers itself and distribute them in a way that is fair. Or government could issue a tax credit to anyone who can demonstrate that they had paid too much for vital goods during a disaster. What we should not do is destroy the powerful incentives that prices provide for individuals to do good where it is needed most.

Anti-gouging laws are an unnecessary disaster that, tragically, hurt those most who can least afford to be hurt any more.

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 Zwolinski is an assistant professor of philosophy at the University of San Diego.