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Identifying What Is Really Arbitrary

Here’s a third letter to “price-gouging” opponent Marc Michaelson:

Mr. Michaelson:

Accusing me of being in error when I say that prices are not arbitrary, you write that “unless they are reined in by the government sellers in those [natural-disaster] situations can charge whatever prices they want.”

Not so.

Sellers can indeed ask for their wares whatever amounts of money they wish. But asking for an amount of money does not itself create a market price. A market price arises only when a buyer accepts a seller’s offer. Prices are terms of exchange, and each and every exchange requires a seller and a buyer. It follows that for money prices to arise both sellers and buyers must agree on the amounts of money that will change hands. (If you disagree, you must therefore believe that if I list for sale my small condo in Fairfax, Virginia, for $1 billion, then the price of my condo is thereby $1 billion. I wish … but my wish will not come true. The price of my condo is whatever amount of money a buyer agrees to pay for it if and when I choose to sell it.)

The fact that buyers and sellers must agree on terms of exchange before prices arise is sufficient to make market prices non-arbitrary. But working further in this direction is the fact that, by agreeing to pay the prices they pay, buyers reveal that their next-best options are worse. In other words, prices are determined in part by – and, hence, reflect – buyers’ alternatives. Because in natural-disaster situations these alternatives are made poor by mother nature, these alternatives themselves are not arbitrary – and, hence, the high prices that reflect these poor alternatives are not arbitrary.

In closing, let me note one irony: truly arbitrary prices are those imposed by government diktat. Not only are the maximum allowed prices themselves arbitrary, the resulting artificial reduction in the quantity of goods and services supplied to disaster victims arbitrarily obliges many of these victims to settle for alternatives worse than those that would have been available to them in the absence of government-imposed price ceilings.

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