Question on price gouging in the free market

[nodeal]

A lot Of people seem to have a real worry about price gouging if a free market were to reign supreme. An example of these people's concerns:

A hurricane hits a large area of the country, causing destruction. Sellers of wood now jack up their prices because people have no choice but to purchase wood for construction. Sellers of wood will recognize the desperation and capitalize on it by charging as much as possible in an unregulated market. At least thats how the argument goes.

So how does capitalism protect consumers from price gouging? Especially in the scenario like the one i have proposed, where consumers are desperate and need a product/service no matter what?

[ghengis86]

http://mises.org/daily/2460

So, once again, it needs explaining why price gouging is not only not bad, but is essential to the welfare of everyone involved. Without it, people don't get the essential goods they need after disasters. Free markets here are humane and necessary

[awake]

Price gouging is a magicall term to call forth the governemnt. There really is no such thing, prices refelct scarcity and ration important resources every minute of every day. High prices call forth more needed resources thus lowering the prices with out cutting off the supply like the government loves to do.

[angelatc]

In your example, the value of the wood rises because demand rises. The market will eventually fix the prices by the inevitable increase in supply. Until then, it isn't "price gouging" - it is simple economics. When demand goes up and supply goes down, prices go up. Trying to prevent that by putting price caps in place inevitably causes shortages.

Think about it - if you know the store is going to run out of wood, you'll buy as much at the artificially low price as you can because you know they'll run out. If the price is astronomically high, you'll only pick up what you absolutely need, because you know the price will be coming down soon.

[dannno]

A lot Of people seem to have a real worry about price gouging if a free market were to reign supreme. An example of these people's concerns:

A hurricane hits a large area of the country, causing destruction. Sellers of wood now jack up their prices because people have no choice but to purchase wood for construction. Sellers of wood will recognize the desperation and capitalize on it by charging as much as possible in an unregulated market. At least thats how the argument goes.

So how does capitalism protect consumers from price gouging? Especially in the scenario like the one i have proposed, where consumers are desperate and need a product/service no matter what?

Some good answers so far, but let's look at your example for where wood is scarce and prices go up. (Edit: angelatc just touched on this a bit as I was typing my post)

The first thing is that the price going up is not just a good thing, it's a GREAT thing.

Let's pretend wood is $5/length before the catastrophe.

After the catastrophe the price of wood goes to $20/length.

Now we have two choices, we can have the government force a price ceiling at $5/length, or we can let the free market go to work!

With the government price ceiling at $5/length, there will be no motivation for wood suppliers to bring more wood into the area. Since the demand for wood has increased, this will lead to a shortage of wood. Wood retailers will be out of wood, waiting for their normal orders.

The question is, what is an effective way for the wood retailers to bring in more wood from the outside market? The best way is to raise their prices!!

In our hypothetical situation, government finally realizes this, so they end the price ceiling on wood. So they order a bunch of wood for $10/length and suddenly there are wood suppliers all over the place willing to send their wood there instead of to the other places where prices are lower. The wood retailers sell the wood at $20/length. Eventually things cool off, and prices go back down to normal.

[bwlibertyman]

My answer to price gouging without getting into a half an hour explanation of my position would be to say that people can protect themselves from price gouging. We always have the option not to buy.

I think it's important to keep in mind that producers ALWAYS charge as much as they can. In a for profit business it is vital to charge as much as possible to increase profits. Ideally producers will sell at the market rate. This is synonymous with saying that producers will charge prices as high as the consumer is willing to pay. This doesn't change in the hurricane scenario. People want things and producers provide them. The government does not protect us from price gouging today, nor should they. I feel that 3.05 a gallon is a little high but I still choose to pay it.

So my first statement is that no entity should protect anyone from price gouging. We as consumers always have the option to either buy from someone else, wait out high prices, or not buy. It's really pretty simple. If we want more expensive products we should either save or get a higher paying job. This gets to the heart of the free market or a voluntaryist society. We enter into voluntary or consensual agreements.

My second statement about charging high prices for relatively undifferentiated products is that it doesn't make sense. If I sell dirt; dirt that has nothing special about it and I charge high prices, I will go out of business. It does not make business sense to charge high prices for something that isn't any better than another product. When we add in the hurricane situation this doesn't really change. Always remember the people have the option to not buy. No one is forcing people to buy products at higher than normal prices.

[cavalier973]

Two articles: http://articles.orlandosentinel.com/2004-09-18/news/0409180178_1_altman-general-charlie-crist-debary

http://abcnews.go.com/2020/Stossel/story?id=1954352&page=1

The gov't would rather people go without generators at all after a hurricane, than have them pay a higher price for the generators than what they were selling for before the hurricane.

[virgil47]

I guess this is why medical treatment is so costly. The price goes up if enough people want medical care. In other words the more people that need care the more expensive it will be. Competition for your dollar doesn't come into play because of the lag time in getting new doctors.

[TCE]

I guess this is why medical treatment is so costly. The price goes up if enough people want medical care. In other words the more people that need care the more expensive it will be. Competition for your dollar doesn't come into play because of the lag time in getting new doctors.

We have an extremely controlled market in health care, that's why the price is so high. We don't allow competition from Mexico, Canada, or anywhere else in the world for drugs because it is illegal. We don't allow insurers to compete across state lines, we force insurers to cover all of these items, forcing premiums higher. We ban any nutritional supplement or food for preventing disease, so only drugs can legally help someone. New medical technology comes out all the time, but it doesn't bring the cost down because of all the upward pressure on prices. Medicare and Medicaid are perfect examples. People see it as free, so they use as much of it up as they can, which drives the prices sky high.

[nodeal]

Yeah, you guys really helped me out with this one. The links, the opinions, and the facts -- I appreciate it all.

[nodeal]

Another question, though. I understand that when you have an increase in demand without an increase in supply, then of course the logical result would be an increase in prices. I also understand that this increase in prices results in these limited resources being rationed to those that need them most. However, it also seems that the limited resources would be rationed off to those that have the most money to pay for it, not necessarily those who just need it most.

In other words, what about the people who need it as much as the next person, but simply cannot afford the increase in price?

[RonPaulGetsIt]

In other words, what about the people who need it as much as the next person, but simply cannot afford the increase in price?

The higher prices will draw more supply to market faster than any government intervention. let the power of the free market work.

See Here: (http://www.freemarketfan.com/2010/06/evil-price-gouger.html)

[Brooklyn Red Leg]

Also, remember that eventually someone will undercut the competition to get a better price on things. While prices will likely rise due to scarcity, at some point someone will go 'Ya know, its better off if I have X amount of dollars from unloading all my excess than no dollars and holding onto my shit'.

[Acala]

Another question, though. I understand that when you have an increase in demand without an increase in supply, then of course the logical result would be an increase in prices. I also understand that this increase in prices results in these limited resources being rationed to those that need them most. However, it also seems that the limited resources would be rationed off to those that have the most money to pay for it, not necessarily those who just need it most.

In other words, what about the people who need it as much as the next person, but simply cannot afford the increase in price?

They go without or rely on charity. Listen Eugene, when resources are scarce there are only two ways to allocate - by force (government) or by free exchange. Government allocation, besides being immoral, ALWAYS fails. Market allocation brings the demanded resources to those who need it faster and more efficiently than any other means.

Prices are not some random number someone pulls out of a hat. Prices are rich with information that market actors use to make decisions. When market prices shoot upwards, there is a REASON. Those prices are screaming to the market "bring me tons more of this NOW!" And the market will respond UNLESS government interferes and turns off the signal. Then people will go without.

[MelissaWV]

As to the last question, also remember that "the rich" are not all cartoonishly heartless bastards. Most people are not buying enough wood, directly after a storm and before roads are clear, to actually rebuild their house. They are looking to shore up supports, build temporary shelter, etc.. Once they are done with that portion of wood they needed, or those tarps they require to safeguard their remaining belongings, they will share the excess freely, sell it at a slight loss to them, or hoard it for the next event. Most people are not going to bother with the last one.

If all else failed, and we are talking about such a catastrophe that "help" and new supplies are not available in any quantity for months, then you will see looting. You will see the forgotten groups of people lashing out violently against whoever has the supplies (or is perceived to have them). That is also motivation for places to give some of their stash away, or for people to share, but in extreme cases it's going to be unavoidable. There are many, many people for which the desire for a tarp to keep out the elements trumps any scruples they may have once had.

[silverhandorder]

Another question, though. I understand that when you have an increase in demand without an increase in supply, then of course the logical result would be an increase in prices. I also understand that this increase in prices results in these limited resources being rationed to those that need them most. However, it also seems that the limited resources would be rationed off to those that have the most money to pay for it, not necessarily those who just need it most.

In other words, what about the people who need it as much as the next person, but simply cannot afford the increase in price?

They wait until the price goes down. Here is the thing. A properly working market tends to eliminate profits. This means the profits attract suppliers until it is saturated to the point where the action yields no profit.

Now about people with money getting their stuff first. Yes that is true. But as the price is going down due to more people entering the market to supply the good the other people with less money will be able to afford these goods.

If you have a system that works better show me. Government price controls obviously do not work. The price controls help first come first serve but fall short at actually making sure everyone gets the supplies. So what the point worrying about those without money when you have no alternative that will get supplies in their hands?

[torchbearer]

supply and demand.
supply very rare, demand through the roof = extreme high prices.
thus, i get the incitive to produce said good- along with a lot of other people.
it is the only fair way to distribute resources.

This is also why so many people get into black market selling. price incentive.
the tougher drug laws get, the higher the price of the goods, the more people sell the banned good.

[RCA]

Somebodieeeeee hasn't read thiiiiis:

http://www.amazon.com/Economics-One-Lesson-Shortest-Understand/dp/0517548232/ref=sr_1_1?ie=UTF8&qid=1293986829&sr=8-1

[anaconda]

There is real fear among sellers of huge consumer blowback if they were to price gouge. There are documented cases of sellers being ruined after they engage in price gouging. doesn't mean it won't happen. On the other hand, there is some justification for adjusting prices to match a free market equilibrium.

[virgil47]

As to the last question, also remember that "the rich" are not all cartoonishly heartless bastards. Most people are not buying enough wood, directly after a storm and before roads are clear, to actually rebuild their house. They are looking to shore up supports, build temporary shelter, etc.. Once they are done with that portion of wood they needed, or those tarps they require to safeguard their remaining belongings, they will share the excess freely, sell it at a slight loss to them, or hoard it for the next event. Most people are not going to bother with the last one.

If all else failed, and we are talking about such a catastrophe that "help" and new supplies are not available in any quantity for months, then you will see looting. You will see the forgotten groups of people lashing out violently against whoever has the supplies (or is perceived to have them). That is also motivation for places to give some of their stash away, or for people to share, but in extreme cases it's going to be unavoidable. There are many, many people for which the desire for a tarp to keep out the elements trumps any scruples they may have once had.

So what you are really saying is that it is not only counter productive but dangerous to stock up on food and other supplies that will be needed in case of civil unrest As those that choose not to save up (the grasshoppers) will simply take it in any event.

[virgil47]

We have an extremely controlled market in health care, that's why the price is so high. We don't allow competition from Mexico, Canada, or anywhere else in the world for drugs because it is illegal. We don't allow insurers to compete across state lines, we force insurers to cover all of these items, forcing premiums higher. We ban any nutritional supplement or food for preventing disease, so only drugs can legally help someone. New medical technology comes out all the time, but it doesn't bring the cost down because of all the upward pressure on prices. Medicare and Medicaid are perfect examples. People see it as free, so they use as much of it up as they can, which drives the prices sky high.

Should we allow competition from foreign sources? Do we know they are truly safe? Do you want to be the one that finds out? Insurers should be allowed to compete across state lines. Medicaid and medicare are not seen as free! They are seen as bought and paid for. You are essentially saying that those with medicare and medicaid should only use enough of those resources to keep themselves alive but not necessarily in the best of health.

[osan]

A lot Of people seem to have a real worry about price gouging if a free market were to reign supreme. An example of these people's concerns:

A hurricane hits a large area of the country, causing destruction. Sellers of wood now jack up their prices because people have no choice but to purchase wood for construction. Sellers of wood will recognize the desperation and capitalize on it by charging as much as possible in an unregulated market. At least thats how the argument goes.

So how does capitalism protect consumers from price gouging? Especially in the scenario like the one i have proposed, where consumers are desperate and need a product/service no matter what?

There is no such thing as "gouging". the term itself implies something "wrong" and therefore worthy of being banned by law. The concept is based on the wholly erroneous assumption that there is some sort of objectively determinable, absolute, legitimate price range for a given item and that pricing above the upper limit should be banned. To this I say BULLSHIT. Let all comers charge whatever they think they can get. The market will decide. Nobody is ENTITLED to my wares at a price someone else sets for me. Were this reasonable, why not just set all prices to zero so nobody is "gouged", especially the poor.

The question presupposes the need for protection. When markets are truly free, the nature of commerce is to abhor a vacuum in competition. In a truly free market those wishing to charge extortionately for goods and services will find their windows of opportunity temporally limited. If the time frame is short, they will "get away" with jacked up pricing, but what will they do afterward? For some, reputation is still important. All that aside - the supply-demand phenomenon still applies to disaster situations. When demand outstrips supply, prices go up. Those with an entrepreneurial bent will see the market and rush in to "help". Prices fall. That is the way it works.

All this liberalistic do-gooder nonsense that is used to "regulate" the market does thousands of units of harm for every unit of good, if good can even be said to apply at all. This is all just another element in the pussification of America and indeed the whole world. Make people afraid of self-reliance, work, death, and so on. Reels them right in and lines them up beautifully for the "state".

Freedom is at once thrilling and utterly terrifying. Can't have the one without the other, as is the case with freedom and responsibility. Two sides of the same coin. Most people do not much care for the downside and would, therefore, prefer their pretty slavery and the illusion that they are getting something for nothing. The world doesn't work that way.

[osan]

In other words, what about the people who need it as much as the next person, but simply cannot afford the increase in price?

Higher prices in a local market constitutes an opportunity for ARBITRAGE. There are two cardinal rules of arbitrage: the opportunities are rare; the opportunities are short-lived.

Hurricane hits, lumber prices soar. Why sell this new load in Bumfuk IO when I can ship it to FL and get 4x the profit? I and everyone else sees this and the lumber rushes in. In a short while prices fall, probably very close to "normal".

As for those who cannot afford, them's the breaks. I've not seen a paycheck now in over 3 years. There's all manner of things I would like that I cannot afford. What do I do? I go without. What don't I do? Whine about how unfair it is and demand someone else pay my way.

Life sometimes is REALLY shitty. We cannot escape this and no amount of bleeding-heart do-gooder masturbation is going to change that. Woe is part of the fabric of life. We try to avoid it but cannot always do so. It helps nothing to bring harm to even more people in the misguided attempt to help "victims".

Every day of our lives when we rise we toss the dice. Some days we win - others, we lose. It's OK - we don't need nanny-staters rushing in to shower us with the contents of the wallets of others. It is not only unnecessary, it is most obviously immoral and deleterious to the spirit and the nation.

Do-gooders are fools. Well intentioned, perhaps, but fools no less.

[MelissaWV]

So what you are really saying is that it is not only counter productive but dangerous to stock up on food and other supplies that will be needed in case of civil unrest As those that choose not to save up (the grasshoppers) will simply take it in any event.

I am saying that there is a balance which must happen. Riots are reality, and one can also stock up on defenses to hold off people for a time, but not indefinitely. Store all the food and water in the world, but if you cannot defend yourself and inspire no loyalty in others, you will be storing it for someone else.

A bit of charity can go a long way towards making sure you're towards the bottom of someone's "To Raid" list.

[osan]

Government allocation, besides being immoral, ALWAYS fails. Market allocation brings the demanded resources to those who need it faster and more efficiently than any other means.

A great example of this goes back almost 30 years when NYC was looking to rennovate the skating rink in Central Park. The imbeciles on the city council were going at it for heaven only knows how long. It was so stupid as to strain credulity. Finally Donald Trump decided he had enough of the nonsense and sent in a crew who did the job in no time and at no charge to the city.

When it wanders beyond the boundaries of its legitimate functions, governance plainly, simply, and completely ultra-sucks.

Does the market need regulation? Of course it does. It needs to be regulated against fraud and other crimes. If a company poisons people with bad food or meds or what have you, let those responsible pay whatever the price may be. Sometimes that is just money. Other times it is prison time. Sometimes it is both. Pricing control is not a legitimate function of just governance, so officials need to keep their noses out of it.

[virgil47]

A great example of this goes back almost 30 years when NYC was looking to rennovate the skating rink in Central Park. The imbeciles on the city council were going at it for heaven only knows how long. It was so stupid as to strain credulity. Finally Donald Trump decided he had enough of the nonsense and sent in a crew who did the job in no time and at no charge to the city.

When it wanders beyond the boundaries of its legitimate functions, governance plainly, simply, and completely ultra-sucks.

Does the market need regulation? Of course it does. It needs to be regulated against fraud and other crimes. If a company poisons people with bad food or meds or what have you, let those responsible pay whatever the price may be. Sometimes that is just money. Other times it is prison time. Sometimes it is both. Pricing control is not a legitimate function of just governance, so officials need to keep their noses out of it.

I agree with the idea of punishment for creating harm. My problem is with foreign business organizations that are beyond the reach of our laws. Should we encourage the participation of these groups that can not be punished for harming those that they serve. The idea of not doing business with them as a form of punishment is simply a non starter. Too many peoples well being would be put at risk in order for the market to correct this issue.

[nodeal]

I can now destroy anyone who tries to use price gouging as an attack on the free market!

But let me make sure I got this correct:

When demand is high for a particular product but supply is low, prices will be high. Profits to be made from the selling of this particular product will be great, and it will therefore attract more investment, production, etc. The supply will therefore increase as a response, and prices will go back down to "normal".

So I'm guessing this works for a scenario of opposite nature? In other words:

When demand is low for a particular product but supply is high, prices will be low. Profits to be made from the selling of this particular product will be small, and it will therefore lose investment, production, etc. The supply will therefore decrease as a response, and prices will go back up to "normal".

Is that correct?

[teacherone]

correct-- the market is self regulating.

rand paul refers to it with the medical term: homeostasis-- when we eat candy our blood sugar spikes, our body automatically produces insulin to counteract the high blood sugar, balance is restored.

this works with money as well-- (given a free market) when the economy heats up too much money starts getting tighter and more expensive cooling the economy off before a bubble can be formed.

this eliminates the boom-bust we get with central control over money.



http://www.youtube.com/watch?v=moIC4RufuKE

[virgil47]

correct-- the market is self regulating.

rand paul refers to it with the medical term: homeostasis-- when we eat candy our blood sugar spikes, our body automatically produces insulin to counteract the high blood sugar, balance is restored.

this works with money as well-- (given a free market) when the economy heats up too much money starts getting tighter and more expensive cooling the economy off before a bubble can be formed.

this eliminates the boom-bust we get with central control over money.



http://www.youtube.com/watch?v=moIC4RufuKE

This is correct for many things but not all. Gasoline is a prime example but this may be attributed foreign businesses and our greedy tax loving government.

[TCE]

Should we allow competition from foreign sources? Do we know they are truly safe? Do you want to be the one that finds out? Insurers should be allowed to compete across state lines. Medicaid and medicare are not seen as free! They are seen as bought and paid for. You are essentially saying that those with medicare and medicaid should only use enough of those resources to keep themselves alive but not necessarily in the best of health.

Yes we should. Canada has an FDA that is considered better than ours. Those people have been taking the drugs from day one and they're fine, why aren't they good enough for us? Instead of this free market competition, the FDA bans all competitors and says that if the drugs are not American, they are illegal. If you'll recall from the healthcare debate, the Republicans attempted to allow Canadian drugs but the Democrats blocked it because the drug companies paid off Obama with $80 billion to finance the bill. Obviously they are making much more money than that. Shouldn't you and I have a choice which drugs we buy? Why is the FDA mandating we can only purchase US drugs? Obviously their safety protocols are worthless. See: Vioxx along with every other drug that seems to get recalled.

I am not saying that at all. I have seen what happens. If I have free Medicare/Medicaid, which is what it is, I will buy up as many drugs, procedures, etc as I can and it's "free." What happens is, you have all these people purchasing all of these procedures, medications, etc they wouldn't have otherwise and the price skyrockets. Medicare, for instance, allows 3 free days in a hospital for certain conditions. We kept my Grandma in there two extra days because it was free. Why shouldn't we? If we had to pay for it, that never would have happened. As a result, everyone's taxes go up to pay for that kind of abuse.

[axiomata]

Also allowing prices to increase to reflect the demand surge as a result of a hurricane will incentivize speculators to get involved. Enterprising entrepreneurs will buy up wood before the hurricane season and warehouse it in anticipation of the hurricane season. This speculatative process will smooth out the long term price of wood and provide more access to wood once the hurricane hits. Speculators would have no incentive to take this risk if they are prevented from taking higher prices if the hurricane hits.