Price-Gouging: Is It Really Wrong?

Capitalism is a continuing education that steam-rolls everything I was taught by my liberal professors in college.  When gas prices rise, everyone screams for price controls. Sometimes state governments cave into the pressure and implement price controls. When they do, they make the problem worse them ever. The price stays exactly where the cap is placed (because demand is unchanged), the resource runs out (empty gas stations), and people suffer from lack of accessibility (think Soviet Union).

The laws of supply and demand are remarkably predictable. They are also incredibly resilient against government meddling. It's like trying to change a stone pillar by punching it with your fist. The stone pillar stays the same, your fist is the only thing changed. And the change is not what you wanted (think Barack Obama).

This goes against the grain of what we emotionally feel is right and wrong. But what we emotionally feel is right and wrong is not the same thing as what is factually right and wrong. Price-gouging is a case in point. Doesn't it just seem wrong for the price of gas to suddenly go up 300% in the middle of a storm, or perhaps in the anticipation of an approaching storm? How about when hotel prices go up 200% in the aftermath, or in the approach of, a hurricane? It seems sneaky, doesn't it? It seems greedy, doesn't it? Well, let's consider the options.

Scenario #1: The price of a hotel room at the Holiday Inn in Marietta, Georgia gets capped at the normal rate of (hypothetically) $100 per night. Suddenly, there is an influx of Floridians in the area, looking for shelter to escape the latest hurricane bearing down on their state. A car pulls-up with a family of four. The Dad or Mom asks the price of a room. At $100 for one night, they take two rooms, one for them, the other for the kids. More cars come. Within hours, all rooms are booked and everyone else who comes gets turned away. Shelter is no longer available for those who need it. The price has been capped. Shortage is the consequence.

Scenario #2: The price of a hotel room at the Holiday Inn in Marietta, Georgia rises to $300 per night in the anticipation of the approaching hurricane in Florida. The first car carrying the family of four pulls-up. The Mom or Dad asks the price of a room for one night. The clerk tells them it will be $300. They scratch their heads and decide they will take only one room instead of two. The family of four crowds into one room for one night. Four hours later, another car bearing a family of four pulls-up. The first question they ask the clerk is, "Do you have any available rooms?" With an ear-to-ear grin, the clerk responds, "We sure do. It will be $300 for one night." The car parks in the lot. The ignition turns off.

In the fall of 2008, there was a massive gasoline shortage in the metro-Atlanta area. There had been a hurricane in the Gulf, which disrupted some of the pipelines metro-Atlanta draws from. The price of regular gas rose dramatically to (if my memory serves me correctly) around $4.25 per gallon. (It seemed like a lot at the time). Unbeknownst to me, a Georgia law capping the price of gas kicked-in. Soon, rumors spread of shortage. Lines of cars piled up at gas stations and in the roads leading to them. Every station in Marietta was dry. My wife, Katie, and I would leave the house at midnight sometimes, when we learned of a shipment that had just arrived at one station or another. Literally, we left the house at midnight or even at 2 a.m. to put gas in our cars.

Now, let us imagine that the price of gas had been allowed to naturally rise to about $9 or $10 per gallon. Had that been the case, you could be sure people wouldn't have run to the gas station, all at once, with all four cars and extra gas cans, and filled everything up! It is also, a reasonable possibility that the stations may not have run out of gas, even with the disrupted pipelines from the Gulf. 

Prices rise and fall with the relationship between supply and demand. With an approaching hurricane, demand suddenly goes through the roof. To prevent supply from running out, prices must rise to match demand. Once demand is satisfied, prices fall just as quickly. These laws are cold, but they have a desirable logic of their own. We should keep these things in mind before we scream for price controls to combat price-gouging.

Jason A.