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The Price of Something Is Not Necessarily the Cost of that Something

Here’s a letter to a woman who heard me interviewed this morning on the radio about so-called “price gouging”:

Ms. Kera Singh

Ms. Singh:

Thanks for your e-mail.  About my opposition to government prohibition of “price gouging,” you ask “What if someone cannot afford to pay the high price for a motel room or for even some water?”

Your question is good and appropriate.  I can’t deny that the possibility you raise might occur or that its occurrence would be tragic.  But I don’t believe that this possibility is sufficient to justify government restrictions on prices following natural disasters.  The reason is that another possibility is much more likely than is the one you identify.  This other, more likely possibility is that price controls make desperately needed goods and services even more expensive – more difficult and costly to get – than goods and services would be without such controls.  I spell out in this blog post some of the reasons why price controls likely inflict disproportionate harm on the poor – that is, why price controls likely further reduce, rather than increase, poor people’s access to much-needed goods and services.

I’ll be happy to elaborate more on this blog post if you wish.  But let me close here by noting an inescapable reality: under such severe circumstances, too often the choice is not, say, a bottle of water for $25.00 or a bottle of water for $2.50.  The choice instead is a bottle of water for $25.00 or no bottle of water for $2.50.  No one wants to pay $25.00 for a bottle of water, but no person desperate for water will reject the option of buying a bottle of water for $25.00 if the alternative is to have no water to buy at the government-capped price of $2.50.  Harsh as they are, these alternatives – high prices for goods that are available, or low prices for goods that are not available – are typically the ones that confront people in disaster-ravaged areas.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030


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