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A Wave of Price Gouging

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Yazad over at AnarCapLib posted [2] on this thoughtful essay [3] in the Times of India by Swaminathan Aiyar. Aiyar is a market liberal who is distressed at the rising prices of staple goods in the wake of the horrible tsunamis. Aiyar writes as if the higher prices are a second wave of misfortune to strike the victims.

Aiyar’s reaction is understandable but mistaken. The higher prices are the direct and unavoidable consequence of the tsunamis – a direct and unavoidable consequence of the gargantuan destruction of homes, businesses, inventories, and infrastructure, and of the corresponding increase in demand for the goods and services needed to get these people’s lives back to some semblance of decency.

The higher prices reflect the prevailing market values of goods and services. That these prevailing values are now higher than they were before the tsunami is a result only of the tsunami; they are not another, separate hardship.

……..

I recall a discussion I had about five years ago with a very bright college student who rejected my argument that price increases in the wake of natural disasters merely reflect the now-reduced supplies and now-higher demands. He rejected also my argument that, because these price increases reveal correct information about the now-more-unfortunate state of the world, these price increases are beneficial.

I pointed out that if you compel a grocer to part with bottled water now valued at (say) $25 per liter (as opposed to $5 per liter pre-disaster), you are

(1) forcing false and misleading information upon the market;

(2) stripping away incentives for suppliers to do what most needs doing (namely, increasing supplies in the ravaged areas);

(3) encouraging black markets;

(4) forcing shop owners to substitute some arbitrary means of allocating their very scarce supplies among the very large number of people who can use these supplies;

(5) forcing shop owners to bear a disproportionate amount of the burden of extending charity to victims.

Point number (5) really annoyed my young friend. "What do you mean?" he demanded.

I replied. "If Safeway can fetch $25 for a bottle of water that yesterday was priced at $5, $25 is the market value of that bottle of water. If you force Safeway to sell it at a price no higher than $5, you’re forcing Safeway to make a charitable donation of $20 to each person lucky enough to be able to buy the water. There’s nothing wrong with Safeway extending charity, but why compel it to do so in this particular way?"

I went on: "And why be angry at Safeway for charging $25 for a bottle of water when other people – say, people in the next state who are unaffected by the disaster – can easily afford to give to a victim of the disaster the $20 to help the victim purchase the bottle of water?"

To demand that Safeway keep its prices artificially low is to demand charity from Safeway.

My young friend replied: "Different roles for different souls."

I told him that slogans aren’t solutions, and left it at that.

But it occurs to me now that his slogan is right-on: different roles for different souls indeed!

And an important proper role of a merchant, in his capacity as merchant, is to adjust prices to equate his demands with his supplies. Without intending to do so, he serves the best long-run interest of larger numbers of people by helping to convey to market participants everywhere the true value of goods and services.

He can give charity, but the best way for him – as merchant – to do so is cash handouts.

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