I noticed that consumers at a local clothing store had been charging the business 1/4 of a long-sleeved dress shirt for one of their $20 bills. (Umm, that's $80 per shirt.) Then a natural disaster happened - it got really warm. (Probably global warming.) This change in the weather gave me an opportunity to price gouge the clothing store.
You see, the unexpected hot weather caused a change in market conditions for long-sleeved dress shirts and people stopped buying them. But the store was becoming more desperate for $20 bills. This opened up an opportunity to engage in raw, greedy price gouging on my part. I told the store manager that I would sell one of my $20 bills to him for one shirt.
I heard the manager mutter under his breath something like, "I was paying just 1/4 of a shirt for a $20 last month. It's outrageous that people now want me to pay one whole shirt for a $20 bill."
I told him that he could take it or leave it and that I have a line of clothiers waiting desperately for me to sell them my twenties. It cost him a whole shirt for one $20 bill that just one month ago had cost him just 1/4 of a shirt. I was ruthless. (For Moryam, that does not mean "without Ruth.")
Did I charge the clothier an unconscionably excessive price to obtain my $20 bills? Is there a difference between me buying a shirt on sale (one side of an exchange where the seller pays more in the form of more shirts per dollar) and having to pay more for ice after a hurricane (the other side of an exchange where the buyer pays more in the form of more dollars per bag of ice)? I was really surprised to see some of the comments by noted economists regarding this issue.
There are two reasons (other than my great reasoning above) for why price gouging laws run counter to the interests of residents where they are enacted:
- A misallocation of resources in that people with lower valued uses for the scarce resource will obtain and use the resource rather than someone with a higher valued use. Think of me using bags of ice to keep my sodas and feet cold after a power outage at the expense of someone else who needs ice to keep their higher priced medicine cold. If the price of ice remains at $2.50, I get cold sodas. If it rises to $10, I'm drinking warm soda and the medicine stays cold.
- The law destroys the incentive for people outside the affected area to bring in needed supplies. After Hurricane Ivy hit the Outer Banks last year, people needed ice. If it costs someone in Raleigh or Richmond $2 per bag to truck ice to the Outer Banks, they can make a greater profit by shifting sales from Raleigh or Richmond at $2.50/bag to the Outer Banks at any price above $4.50/bag. Forbid the price from increasing to more than $2.50 per bag and you'll have a shortage of ice. Allow it to rise and people will do well by doing good. They will better serve their self-interest by trucking more ice to the adversely affected areas.