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An anonymous e-mail correspondent (who signs his or her name only as A Caring Person) read my posts on price-gouging (here [2] and here [3]) and accuses me, among other sins, of ignoring "the needs of the most needy." The idea is that, because I oppose government restrictions on price increases in the aftermath of natural disasters, I forget about or disregard poor people – "the most needy" – who might not be able to afford to pay the higher prices.
I’ve addressed this argument in previous posts. But another point is warranted.
When someone refers to "the needy" or "the most needy," we all think of very poor people. But the concept "needy" or "most needy" can be vague, especially in the wake of a natural disaster.
Suppose a violent hurricane hits New Orleans, doing major damage. Further suppose that John Deaux, an ordinary, working-class American living in New Orleans, is lucky; his house suffers only minor damage (say, a few shingles flew off of the roof above his front porch). Richard Smith’s house, in contrast, suffered severe damage. The storm ripped the roof off of his house. Suppose that Mr. Smith earns an annual income well above average – one much higher than the annual income earned by Mr. Deaux.
When it comes to roofing-repair services and materials, which of these two men now is most needy? Seems to me that it’s Smith, even though he’s wealthier than Deaux. Smith needs roofing-repair services and materials much more than does John Deaux.
Will the market ignore needy Smith? Nope. He’ll offer to pay a premium to get his need (a repaired roof) taken care of as quickly as possible.
Now change the example. Suppose that lower-income John Deaux’s roof sustains significant damage while higher-income Richard Smith’s house merely loses a few shingles. Will the market ignore the now-needy Deaux? No. Even though he must dig deeper into his pocket than Smith would have to dig, Deaux can and will offer to pay to have his roof repaired as quickly as possible.
Importantly, Smith will not compete with Deaux for emergency roofing-repair services and materials (even though Smith is wealthier than Deaux and ‘needs’ to have his roof’s slight damage repaired). Because post-disaster prices, if left unregulated, will rise to reflect the now-greater need for repair services and materials, these high prices will likely persuade Smith to wait to have his insignificant damage repaired.
The fact that Smith is wealthier than Deaux doesn’t mean that he’s indifferent to prices. The higher the price of roofing-repair services in the aftermath of the storm relative to the ‘normal’ price of these services, the more likely it is that Smith will wait until the price comes down. By persuading Smith voluntarily to wait to have his minor damage repaired, the immediate-post-disaster higher prices – the "gouging" prices – free resources to serve needs more urgent than Smith’s, such as repairing John Deaux’s severely damaged roof.