Tue, 10 May 2005

Price Gouging

Donald J. Boudreaux is the editor of The Freeman, and also blogs at Cafe Hayek. His article in the current issue, unfortunately only available in PDF form, not HTML, deals with Price Gouging. It's very well written, but he misses a point about the justice of higher profits for producers and distributors of in-demand goods. He says that those profits could be donated to a relief effort. I say not.

When a shop-keeper in an area in emergency conditions raises his prices, he profits more. This seems to be a side effect of the more important aspect of higher prices signalling higher demand. It isn't. Emergency conditions are predictable. Where I live, the typical emergency is an ice storm. The kinds of goods that are needed to survive an ice storm are predictable: generators, fuel, food, and bottled water. Those shop-keepers who stock extra of these items during times of higher risk of ice storms will profit more. That's not unfair, that's just the reward for good speculation.

We should set the rules of a market society so that rationality is rewarded, and the seven deadly sins are punished. When a shop-keeper plans ahead wisely, if an emergency hits, he will make higher profits. This serves as an incentive to be wise. It is exactly this attribute which makes free market societies function so well. The prudent are rewarded. That is how it should be.

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