In defense of price gouging and profiteering

Article Highlights

  • The plain reality is that any system of allocating the available water will favor some people and not others.

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  • How about a footrace to the local water warehouse? That would favor the swift and the young.

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  • Market competition is the true route toward consumer protection.

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If you don’t like price rationing, please explain how limited supplies of a good are to be allocated.

Minor news stories with only a local direct interest nonetheless can carry large general implications, and just such a recent item emerged last weekend: Residents of Toledo, Ohio were warned not to use city water supplies due to algae growth in Lake Erie. (After a few days, the water was declared safe to drink.) For those few days, unsurprisingly, the demand and market prices for bottled water increased sharply, and few politicians can resist such opportunities for demagoguery: “Ohio Attorney General Mike DeWine is dispatching employees to the city to investigate complaints of price-gouging on bottled water.” “Price gouging” is a charge ubiquitous in the wake of such events as earthquakes and hurricanes, but the precise meaning of that phrase remains obscure.

As an obvious effect of a natural disaster, public water supplies are likely to be disrupted, and so the demand for a substitute — bottled water — increases sharply. Moreover, even the supply of bottled water might decline, perhaps because of transportation bottlenecks and the like. And so the market price rises, often significantly: There simply is less water available. Some method must be used to allocate the available water among consumers, all of whom are anxious to obtain it.

One method is rationing by price, that is, “price-gouging.” That strikes many as “unfair” because the poor will tend to be denied. But because there simply is less bottled water available, any rationing system will disadvantage some relative to others. For example, suppose that we impose price controls so that the legal maximum price is lower than the market price. In that case, the amount demanded would exceed the amount available; if we force people to wait in line for bottled water, we would favor those with more flexible schedules or with relatively low time values. What’s “fair” about that?

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