Isaac Asimov on Price Gouging

Blog, Regulation, Steve Lafleur

Every time a natural disaster strikes in North America, reports emerge of retailers increasing prices in some locations. This, of course, is generally prohibited, and leads to public shaming. There are, however, good reasons why price gouging needs to happen. The most obvious reason being that high prices are the simplest method of rationing during a shortage. But another important reason for allowing prices to increase is that it can encourage outside firms to ship goods into the affected area. Given the risk of entering a disaster area, there has to be a risk premium for potential sellers. 

While there are no shortage of columns defending “price gouging” (see here, here, and here), one of the most interesting examples I’ve read actually comes from an old science fiction novel by Isaac Asimov. In his Second Foundation novel, an interplanetary war erupts, resulting in a food shortage on the planet Terminus (home to the titular Foundation). One character from the planet Trantor elucidates the mutually beneficial opportunity for a short term increase in trade:

“I was thinking about the war….I wish I could carry food to them.

You know, I’ll bet the Foundation would be willing to pay smuggler’s prices for food right now. Double and triple and more. Gee, if any co-operative, for instance, here on Trantor took over the job, they might lose some ships, but I’ll bet they’d be war millionaires before it was over. The Foundation Traders in the old days used to do that all the time. There’d be a war, so they’d sell whatever was needed bad and take their chances.” 

The beauty of good science fiction is that it allows us to think about issues dispassionately. While we might like to think that people ought to simply risk their own well being to truck goods into disaster areas, stepping back allows us to see why we often don’t. Taking the risk of, say, having part of a trucking company’s fleet washed out in a flood, can have serious repercussions for a company. Given that retail sales have less than a five percent profit margin on average, the odds are strongly against making any profits whatsoever without the ability to charge higher than ordinary prices. Add to that the need to pay overtime to their employees, and the need to create temporary shortages elsewhere, and the company is essentially delivering goods to the affected area at a loss. While it is nice to say that everyone should make sacrifices during a time of crisis, it is unreasonable to expect companies to do so en masse at potentially huge losses. 

As tempting as it is to view price increases during disasters as pure greed, they serve a function. Unfortunately, many journalists and activists seem to view profits (no matter how small) as inherently evil. As well intentioned as they are, advocates of anti-price gouging laws do more harm than good.