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5 Reasons Price Gouging Should Be Legal (Especially During Disasters)

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As flooding in Alberta continues to wreak havoc on people's lives, property and well-being, the media's initial dramatic disaster coverage has started to move on to more human interest type stories.

Thankfully it's been mostly good news: survival stories, loved ones reunited, and cats swimming to safety. It is disappointing, however, to hear the condemnations of "isolated incidents" of "looting and price gouging."

It's obviously troubling that a small number would use the disaster as an excuse to loot; to violently steal another person's possessions, cause damage and inflict even greater misery on an already suffering community. But is price gouging really at all comparable to looting? I'm disappointed not that price gouging is occurring, but that it's only been isolated.

So-called price gouging is a critical economic tool to ensure that supplies last and so can meet ongoing demand. Making it illegal is ridiculous, and here's why:

  1. Without price increases, many people buy extra supplies "just in case", regardless of what they have tucked away at home already. If too many people do this, supplies run out and people who need them much more urgently miss out. With price increases, people who don't really need supplies will leave them on the shelf not out of the goodness of their heart, but out of concern for their wallet.
  2. Price increases encourage conservation of resources people already have. Those who can most easily adjust their consumption will do so, leaving resources free for those who can't. People might, for example, use their cars more sparingly to avoid having to fill up while prices are inflated.
  3. The ability to raise prices encourages businesses to stock excess reserves. Space in stores and warehouses is limited and products (even water) go off over time. If they're not allowed to raise prices on those items, they'll use that limited space for other products that have higher profit margins the rest of the time.
  4. Allowing price gouging actually encourages citizens to be more prepared for disasters. Do you have enough food and water and other essentials stored at home for you and your family if disaster strikes your town? Or do you just assume you'll be able to go to the store and buy what you need when something goes wrong? Knowing that prices might double, triple, or more during a disaster is a pretty big incentive to go and stock up now instead of waiting -- even for that person who lives right next door to the store!
  5. Finally, rising prices attract more resources from outside of the disaster area, where prices are lower. Nearby businesses, small or large, can easily profit by shipping essential supplies in and selling them at a premium. Without the ability to charge that premium, they would actually end up losing money through shipping costs, overtime wages, and inherent risks of operating is a disaster area. Without the profit motive, many don't take the risk.

Of course, people could do all of the above voluntarily and it would be nice if we could rely solely on the goodness of people's hearts. Plenty of this does happen in times of crisis -- people do drive supplies in from out of town at their own expense. But shortages still often happen in the real world regardless -- shortages that we could prevent.

In the United States, corporate giant Walmart -- a common target for anti-capitalist complaints -- actually hires a team of weather forecasters to predict extreme weather events, so they can ship extra goods to areas likely to be affected. Walmart does this to make a profit, but the end result is that they ensure critical supplies are available to the public when they're most needed.

In fact, the more people and businesses that attempt to "exploit" shortages, the less prices would actually increase as all the new suppliers compete against each other. One couldn't sell water for $5 a bottle, if Walmart was selling it for $3.

Some hope that a restriction on the quantity of goods people can buy during crises, can mitigate shortages. But rationing just leads to black market sales at even higher premiums. These restrictions also don't ensure resources go to those who most need them and does nothing at all to incentivize businesses to increase supply to affected areas.

Despite the economic arguments, many people still can't stomach profiting from a disaster, even if it helps the community.

In Calgary, a Facebook page called "YYC Flood Profiteering Shame Wall" sprang up to try and embarrass businesses who increased their prices and has already attracted more than 7000 fans. The page featured posts condemning stores for high prices of water in some stores in the city and praising other stores for putting their water on sale.

Those running the Facebook page missed the irony when they later had to inform people that many stores which had earlier offered sales were now sold out of goods.

So why do we blame the disaster if the store runs out of product, but blame the storeowner if he raises prices? Perhaps because we can easily see one side of the story as a storeowner offers cheap or free essentials to grateful shoppers, but we don't see the people who show up 2 hours later and walk away with nothing after the reporters have left.

Charity has its place, but removing the profit motive from businesses virtually ensures shortages during crises.

"Price gouging" is a derogatory term meant to belittle. A more accurate description would be "sustainable pricing" -- pricing that ensures supplies are sustainable to meet the demand of future customers.

Distributing resources according to whoever lives closest to the store and can get there first isn't any more just than distribution based on prices that reflect need. Higher prices can be painful but at least they allow people to obtain the products they desperately need.

It's time we legalized the art of sustainable pricing to ensure critical supplies are readily available for everyone the next time disaster strikes.