In Defense of Price Gouging

When hurricane Harvey struck the Texas coast, state officials trotted out their usual warnings about price gouging. Under the Texas Deceptive Trade Practices Act, price gouging can result in civil penalties of up to $20,000 per violation and up to $250,000 per violation for victims over 65 years old.

When an item is in short supply, prices rise. Those who value that item the most will pay the higher price. This is true whether a natural disaster is involved or not. However, when businesses are prohibited from raising their prices to reflect the supply, consumers have an incentive to hoard–to buy more of the item.

As an example, on Thursday I saw people buying up to ten cases of water at Lowe’s. I suspect that the store had no water for sale by the end of the day (my local HEB was out of water on Thursday and a nearby Wal-Mart was out of water on Friday morning). Because the price did not reflect the higher demand and lower supply, people bought more water than they probably needed. However, if the price had been increased, individuals would have probably bought less and more people could have bought water. Each individual could choose for himself whether the higher price was worth it.

When natural disasters strike, we hear warnings about gouging, but nothing about hoarding. Gouging helps ensure a supply. Hoarding diminishes the supply.

Penalties for price gouging are intended to protect consumers. But if a consumer is willing to pay $50 for a case of water that normally costs $4, how is he harmed? He values the water more than the $50. It’s his choice. If there is no water available, the price doesn’t matter. Rather than prosecute businesses for raising their prices when a natural disaster strikes, government should encourage the practice.

A business transaction is a voluntary trade in which each party benefits. What we regard as beneficial should be our personal choice, not a determination made by government officials.

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