Price Gouging Is Good

Blog, Peter McCaffrey (historic), Trade, Uncategorized

As Hurricane Sandy hits the east coast, now is a good time to take some time to remember something very important – economics. Slate obliges:

Even in these polarized times, there are some things politicians of both parties can agree. Price gouging, for example, is wrong. New York Attorney General Eric Scheiderman, a Democrat,wants you to know it. But this isn’t just for soft-hearted liberals. New Jersey’s notoriously tough conservative governor, Chris Christie, also put out a weekend press release warning that “price gouging during a state of emergency is illegal” and that complaints would be investigated by the attorney general.

The bipartisan indignation is heartening, but there’s one problem. These laws are hideously misguided. Stopping price hikes during disasters may sound like a way to help people, but all it does is exacerbate shortages and complicate preparedness.

The basic imperative to allocate goods efficiently doesn’t vanish in a storm or other crisis. If anything, it becomes more important. And price controls in an emergency have the same results as they do any other time:  They lead to shortages and overconsumption. Letting merchants raise prices if they think customers will be willing to pay more isn’t a concession to greed. Rather, it creates much-needed incentives for people to think harder about what they really need and appropriately rewards vendors who manage their inventories well.