Economics: The Value of "Price Gouging"

[DBTrek]

"Price gouging" has been given a bad rap. The general sentiment around "price gouging" goes something like this:
"Only immoral assholes would try to capitalize off of desperate people!"

This simple, reactionary, heart-felt response to "price gouging" is generally as far as most people go in their analysis of a much maligned economic practice. What folks often overlook is the self-regulating response people have to price increases. To put it another way, consider a hypothetical hurricane hits Florida, and an enterprising band of entrepreneurs heads to the disaster area with 1000 bottles of water to sell. They decide to sell the bottles of water at $10 apiece, because that's what the "market will bear".

You are the first person in line at the water bottle van. How many bottles do you buy at a price of $10 each? Probably only as many as you *need*, right? You know the hurricane recovery is underway, you know that 50 miles away bottles of water are selling at normal prices, so why would you buy any more than you absolutely need from the "price gougers"?

Now, suppose the local city council sees these "price gougers" arrive and immediately passes a rule stating no one can charge more than $1 per a bottle of water.

Again, you are the first person in line at the water bottle van. How many bottles do you buy at $1 apiece? Probably a lot more than you need, right? I mean, you're in a disaster zone and no one really knows how long recovery will take. You probably buy A LOT of water at the legislated, artificially low price of $1. That's fine and dandy for you, but it also means the people at the back of the line will probably get NO water whatsoever. It will all be sold long before they reach the front of the line.

So you can see how "price gouging" actually serves an important function in these types of situations. By elevating prices people are forced to exercise restraint in their consumption. This leads to more people being served with limited resources - and isn't that a good thing?

[Fife]

Get some

[JohnDonne]

It doesn't make sense that the gougers would bring the same supply of water if the law made the price one dollar instead of ten. There's an obvious incentive here for the gougers to bring more supply to make the same profit as they would in the ten dollar scenario. Bringing more water to the disaster area for an equal profit is good, right?

[Haumana]

It doesn't make sense that the gougers would bring the same supply of water if the law made the price one dollar instead of ten. There's an obvious incentive here for the gougers to bring more supply to make the same profit as they would in the ten dollar scenario. Bringing more water to the disaster area for an equal profit is good, right?

A pallet only holds so much. Same is true for a bobtail, a flatbed truck or a pickup for that matter.

[Hanarchy Montanarchy]

Hopefully the first person in line doesn't have 10,000$ and the enterprising idea to snatch up all them precious bottles and sell them to the rubes behind him for 20$ a piece.
And that the second person in line doesn't have 19,980$ and basically the same idea.
On the plus side, this will incentivize the beneficial practice of getting up early to be first in line.

[Haumana]

Hopefully the first person in line doesn't have 10,000$ and the enterprising idea to snatch up all them precious bottles and sell them to the rubes behind him for 20$ a piece.
And that the second person in line doesn't have 19,980$ and basically the same idea.
On the plus side, this will incentivize the beneficial practice of getting up early to be first in line.

Early bird and all that. Hopefully indeed. Meanwhile the otherside of the coin only requires an initial investment of $1000 to carry out the same scenario. Which is more likely?

[Hanarchy Montanarchy]

Hopefully the first person in line doesn't have 10,000$ and the enterprising idea to snatch up all them precious bottles and sell them to the rubes behind him for 20$ a piece.
And that the second person in line doesn't have 19,980$ and basically the same idea.
On the plus side, this will incentivize the beneficial practice of getting up early to be first in line.

Early bird and all that. Hopefully indeed. Meanwhile the otherside of the coin only requires an initial investment of $1000 to carry out the same scenario. Which is more likely?

It doesn't matter. The point of the price control is to make sure no one is able to take advantage of the temporary price bubble brought on by desperation. It isn't just about the first person to bring water into the disaster area, the initial price isn't all that important.
This idealized and simplified scenario is apologetics for the free market faith, not much more.

[Haumana]

It doesn't matter. The point of the price control is to make sure no one is able to take advantage of the temporary price bubble brought on by desperation. It isn't just about the first person to bring water into the disaster area, the initial price isn't all that important.
This idealized and simplified scenario is apologetics for the free market faith, not much more.

Now it doesn't matter? Why did you post your 10k scenario then?

What is the price point that ensures a more equal distribution of resources?

[Montegriffo]

Hopefully the first person in line doesn't have 10,000$ and the enterprising idea to snatch up all them precious bottles and sell them to the rubes behind him for 20$ a piece.
And that the second person in line doesn't have 19,980$ and basically the same idea.
On the plus side, this will incentivize the beneficial practice of getting up early to be first in line.

Early bird and all that. Hopefully indeed. Meanwhile the otherside of the coin only requires an initial investment of $1000 to carry out the same scenario. Which is more likely?

It doesn't matter. The point of the price control is to make sure no one is able to take advantage of the temporary price bubble brought on by desperation. It isn't just about the first person to bring water into the disaster area, the initial price isn't all that important.
This idealized and simplified scenario is apologetics for the free market faith, not much more.

If the vendor really cares about fair distribution of resources rather than simple profiteering he can set a limit of how many bottles each customer can buy. Simple, and it means anybody can buy water not just those rich enough to afford it.

[Haumana]

If the vendor really cares about fair distribution of resources rather than simple profiteering he can set a limit of how many bottles each customer can buy. Simple, and it means anybody can buy water not just those rich enough to afford it.

You discount the risk involved in getting those bottles to market. The money upfront to purchase said bottles and the potentially harrowing journey to transport those bottles back to a disaster zone. What's that worth? Altruism is a myth, mind you.