More on so-called “price gouging.”
Mr. V__:
Thanks for your follow-up email in which you write that you learned “from videos by Robert Reich that stores have monopoly power after natural disasters. It means high prices are unjustified and inefficient and should be stopped with regulation.”
Respectfully, attempting to learn economics by watching Robert Reich videos is as useful as attempting to learn self-defense by watching professional wrestling matches: neither is the real thing. Both are shows staged for gullible audiences.
As for the substance of Reich’s claim, let’s say that a hurricane destroys all hardware stores in town except one. We might say that this lone surviving store has monopoly power. The most reliable antidote to this power, however, are the ‘monopolistically’ high prices that the store charges. These high prices incite suppliers outside of the damaged region to exert more effort to bring supplies into this region – more effort, that is, than the amount that they would have exerted had prices not risen. And as long as these prices remain unusually high they’ll continue to incite unusually high amounts of effort by suppliers to speed more supplies to the victims of the natural disaster.
The exercise of monopoly power in such circumstances is its own undoing. In contrast, prohibiting so-called “price gouging” protects this monopoly power. And although the monopolist merchants may not charge ‘excessively’ high monetary prices, being monopolists they will extort, in exchange for their wares, nonmonetary benefits that the rich and well-connected are far better able to pay than are the poor and working class.
A final point: Unusually high prices following natural disasters also discourage buyers from purchasing the now-more-scarce goods to satisfy relatively unimportant wants, thus leaving more supplies available to satisfy wants that are more urgent. It follows that outlawing “price gouging” obstructs the role of high prices in allocating existing outputs away from less-urgent and toward more-urgent wants. Price ceilings thus inflict economic harm on natural-disaster victims even if the higher prices would not have incited more supplies to be brought into the damaged regions.
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
