Storms and price gouging
Take care all those near the storm.
‘Price Gouging’ is the name given to traders raising the price of their goods in response to the increased demand in certain situations, often in the wake of some crisis. For example: Traders charging double the regular price for electricity generators after a hurricane. This kind of thing is widely condemned, on the grounds that it constitutes exploiting people who are in a desperate situation.
Here’s why ‘price gouging’ (or less loadedly: increasing price in step with increased demand) should not be banned:
If prices are not permitted to rise, people will queue (or worse) to buy and horde the in-demand items. Those first in line will exhaust the limited supply, the result will be shortages exatly at the time that they’re most damaging.
The high profits of successful ‘gouging’ attract other entrepreneurs to also supply the demanded items in the affected area. Each new seller reduces the profit margin that’s possible to achieve on the items, while increasing the supply. More and more suppliers arrive until prices are driven down to normal levels. Shortages are avoided.
If ‘gouging’ is permitted, then people who accurately see a crisis coming will stock up on the items expected to be in demand—to use themsleves, but also to sell to others. To the extent that this forecasting is widespread, the increased demand allows producers and suppliers to increase their prices (and profit margin) before the crisis. The effect is that new entrepreneurs will be incentivised to sell to this market too, with the same effect of increasing supply and driving down prices (and profits). The result is the distributed knowledge of the population finds expression through the price mechanism, leaving the population better prepared for the crisis, and ensuring that shortages are minimised.
