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Here’s a letter to a Café Hayek reader:
Mr. Mcphail:
Thanks for your e-mail.
About my posts [2] on so-called “price-gouging” you write: “I agree with your statements about how the market functions normally. But my point of confusion is when the alternative to me [of] refusing a seller’s offer is my starving or dying of thirst am I really free to refuse the offer? And in this case does the market process still function properly?”
Your question is good.
Natural-disaster situations do differ from ordinary situations, but not categorically. They differ only in that, for certain goods, demand is unusually high and supplies are unusually low. Evidence that the market is indeed still functioning properly is precisely the fact that it accurately reports these unusual conditions of demand and supply in the form of unusually high prices. These high prices, in turn, prompt ‘proper’ market responses: you and others in the disaster area are led to consume goods and services with greater prudence [3], and – more importantly – suppliers are given intense incentives to work unusually hard to bring more food, water, and other supplies to disaster-ravaged regions.
High prices, as painful as they are, are not as painful as the alternative, which is doing without the goods altogether – and in your example this alternative is fatal. If you will literally die if you refuse to pay a merchant a high price for water, the last thing you want is for anyone to distort the knowledge and dampen the incentives necessary to accurately inform and powerfully entice suppliers to rush more water to the region. Yet distorting such knowledge and dampening such incentives are exactly what prohibitions on “price-gouging” do.
The bottom line is this: so-called “gougingly” high prices are evidence not of a market functioning poorly but of a market functioning well. Further, only by allowing the market to function in this way will more-abundant supplies, lower prices, and other ‘normal’ conditions be restored as quickly as possible. As beneficial to humanity as an unimpeded price system is in normal times, it is never more vital than in desperate times such as those caused by natural disasters.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030