As many goods and services become scarcer due to Hurricane Katrina, there are increasing calls for arresting anyone who engages in u2018price gouging'. Price gouging has been described by government officials as raising prices above the levels they should be in the market during an emergency. Just what constitutes the deviation above the market level is determined by bureaucratic judgment. Normally when the supply of a good decreases or the demand increases, the price of that good should go up. However, during times of government crisis, officials believe they have the power to change the laws of economics. All they have to do is threaten to prosecute anyone who raises their prices above what the government deems is an acceptable level and voil — there are plenty of goods and services for everyone.
Like so much of what the government does, there are unintended consequences for messing with the laws of nature. In the case of the price gouging assault, by denying price increases the government actually causes greater scarcity. Prices lower than the market price (especially in an emergency) will cause a run on the good and service. Then people who see the good first are able to buy the good rather than those who need it the most (and are most willing to pay for it).
The Real Price Gougers
The intent of this article, however, is not to give a detailed analysis of the why the government's campaign against price gouging hurts much more than it helps. The analysis has been very well done in other articles. I hope to show that there is a form of price gouging that should be halted immediately. There is no need for a natural disaster or supply shortage to occur for the guilty individuals to raise prices far in excess of the market rate, but a disaster sure does help. If there is no crisis these individuals are adept at creating one in order to start gouging. After the disaster is over, the prices may go down a little, but the gouging remains. You may ask what kind of business could get away with this over a long period of time, and you would be correct to think that market forces would make a private enterprise lower its price or go out of business eventually. That is why no private businesses can price gouge for any length of time. The only price gougers are governments at all levels.
Since price gouging is paying a price in excess of what the buyer thinks the good is worth, it is impossible to be u2018gouged' in a free market. A driver who sees gas priced at five dollars per gallon and does not buy the gas because he determines he could ride his bike instead has not been gouged. Neither has the driver who buys that five-dollar gas because he values that gas higher than his five dollars. This is the very essence of economic calculation that Ludwig Von Mises preached. The government, however, makes us pay for its services whether we want to or not. The government has to use either force or the threat of force to extract payment from us which indicates that we do not value their services as highly as the money they seize from us. If the government must force people to pay a certain price for its services, then by definition this price must differ from the market rate. If the price is at or below the market rate, the taxpayers would pay for the service voluntarily.
The government also pays far in excess of the market rate for goods and services that it procures. There are numerous examples of $600 toilet seats and $300 hammers with the Department of Defense, or whole lists of projects that the Congressmen bring home to their districts known as pork. All of these projects are bought at a price far in excess of the value received. If a Congressman had bought these goods with their own money, we would perhaps considered the Congressman a bit looney, but we could believe that he valued that Maui Space Surveillance system more than his $34 million (look at the defense hyperlink). However, we all know the money was seized from taxpayers, most of whom fail to understand why anyone would pay $34 million for this project. By forcing the people to pay far in excess of what they would pay in a free market, isn't the government gouging us?
The Biggest Gouger
Besides all the isolated incidents of gouging that we read about every day, there is one arm of the government that gouges all goods and services the Federal Reserve. Since the establishment of the Fed in 1913, our money has been debased to the point where it has lost almost all of its original value. This is gouging in reverse. Instead of raising the price of a good above the market level, the Fed lowers the value of your money. The result is the same. However, when the Fed prints money to drop from helicopters, the government gets the money first, thus profiting at the expense of others who receive the money last. The last recipients of the money must buy goods at inflated prices above what the market price would have been absent inflation. The reason there are $800,000 shacks in parts of California and New York is because the Fed's artificial lowering of interest rates has created abnormal demand. The artificial demand shoots the price up like plywood before a hurricane and gouges homebuyers. The same can be said for those of us who like to save money — we are getting gouged on our rates of return.
If there was a free market in money, prices would actually fall over time as improvements and innovations in production are rewarded, preventing governmental gouging.
So there is an argument to be made for preventing price gouging. Gouging occurs anytime voluntary exchange is replaced with coercive u2018appropriations'. As the politicians and talk radio hosts like to say — u2018Price gouging must be stopped immediately, and the gougers must be brought to justice'.
September 13, 2005