The summer of 2013 marked the costliest disaster in the Canadian province of Alberta’s history.
During this time, severe flooding along many rivers in southern and central Alberta ravaged the region, directly resulting in four deaths, the displacement of over 100,000 people, and primary estimates of CAD $3 to $5-billion in damages.
In the midst of the crisis, media reports began to circulate describing incidents of price-gouging by “greedy merchants” accused of “trying to profit from the desperation of people seeking basic supplies.” One story cited the example of a Calgary liquor store reportedly selling bags of ice for $20 apiece.
The Price-Gouger as Persona Non Grata
Government officials quickly condemned such practices by threatening criminal prosecution for price-gougers. Indeed, the acting fire chief and head of the Calgary Emergency Management Agency told a local radio station that, “Under the Emergency Management Act in the province of Alberta, price-gouging or price-fixing above normal levels during a state of local emergency is illegal, and it would take some co-operation between ourselves and police, but individuals could be prosecuted for that.”
Public sentiment also appeared to echo disdain for price-gougers. For example, one person posted a photograph on Twitter indicating that he paid $48.72 for a case of 24 water bottles, remarking, “Talk about taking advantage of a society in crisis.” (It was later revealed that the retailer in question only sold water bottles individually – not by the case – and that the indignant customer insisted on making the purchase at the price of $1.91 each, plus deposit.)
The Price-Gouger as Hero
On the surface, it certainly appears that the undefendable price-gouger is persona non grata, especially in times of natural disaster. Actually, the misunderstood price-gouger is unfairly demonized. In fact, economics teaches that the actions of price-gougers in an unhampered market economy are especially beneficial during times of crisis.
First of all, consider a consumer’s good, such as the previous example of a bag of ice. The price at which it sells is determined by a combination of supply and demand resulting in a voluntary exchange between an individual seller and buyer. Factors that influence the supply of bags of ice for sale or the willingness of buyers to purchase them may result in a change in price.
For instance, conditions during the Alberta floods disrupted supply chains and rendered various retailers unable to open for business, restricting the available supply of bags of ice. In addition, demand for them likely increased due to power outages that prevented refrigerators from working, as well as the increased use of coolers by displaced persons to store food. In this situation, a predictable consequence of the simultaneous decrease in supply of, and increase in demand for, bags of ice is an increase in price of the good. Indeed, as Murray Rothbard writes in the economics treatise Man, Economy, and State, “(A) decrease in the supply schedule plus an increase in the demand schedule will definitely lead to a rise in the equilibrium price.”
By selling goods at higher prices, so-called price-gougers help convey price signals to would-be consumers indicating that particular goods are scarce and in need of conservation. The rise in price deters submarginal buyers for whom the good is relatively less valuable, allowing it to be purchased by supramarginal buyers, for whom the good is relatively more valuable. In the case of bags of ice, a higher price will ensure that, for example, a person with diabetes has access to the ice needed to store her insulin in order to prevent spoilage. Meanwhile, someone else who desires ice to make strawberry daiquiris for a poolside barbecue will now abstain, choosing to drink Corona and lime instead. In short, price-gougers ensure that resources are allocated to their most desired uses as demonstrated by consumer buying decisions.
In addition, the rise in price will encourage entrepreneurs, ever alert to opportunity, to transport and sell bags of ice in flood zones. For example, if the cost of bags of ice in Edmonton, a nearby city unaffected by the flooding, plus transportation costs is favourable, profit-seeking entrepreneurs will engage in arbitrage, buying bags of ice in Edmonton and transporting them to places such as Calgary where demand is higher. The beneficial result of this process is lower prices for consumers and an increase in supply of the good where it is needed most.
The Consequences of Government Interference
By contrast, government legislation aimed at curbing price-gouging during emergencies curtails these benefits. The failure to increase prices in a time of reduced supply and increased demand results in the wastage of scarce resources. In this situation, there is no economic incentive to a consumer to delay drinking daiquiris during a flood. Shortages also occur, raising the question: what good is a less expensive but non-existent bag of ice?
To make matters worse, willing suppliers are deterred from entering the market because of government coercion. Indeed, contravention of the aforementioned Emergency Management Act in the province of Alberta carries a penalty of “imprisonment for a term of not more than one year or to a fine of not more than $10,000 or to both imprisonment and fine.”
Careful reflection demonstrates that so-called price-gougers effectively allocate scarce resources in times of crisis. Moreover, failing to engage in price-gouging jeopardizes our economic welfare. As Leonard E. Read explained:
When all the ramifications are considered, the seller who refuses to charge “all the traffic will bear” is rendering us a positive disservice. He is failing to allocate resources to the most desired uses, as you and I determine them by our buying or abstention.
In the future, should prices rise in response to a befallen disaster, be thankful for price-gougers. One might even consider tweeting, “Talk about making advantages for a society in crisis.”