Why "Price Gouging" Isn't Evil

In the wake of a natural disaster, it is natural for politicians, pundits, and other talking heads to denounce the horrible evil of Price Gouging.

Price Gouging as popularly defined, is raising prices for essential goods and services in a crisis. The more technical definition includes the term "unconscionable profiteering." There was a letter to the editor which won the weekly award for being the most well written such letter during the week in this Saturday's paper. The thrust was "Why did your prices go up in between new shipments of gas? How could the $70/barrel price of oil have made it to my gas pump so fast?" The quick demon: Price Gouging.

Prices in the market are a function of Supply and Demand. How much do you want something? How much are you willing to pay? How much is the supplier willing to give it to you for? If prices are too high, some people will purchase, but suppliers will be left with a lot of inventory they did not sell (hurts suppliers), while many customers who would have liked that product are left without it (hurts customers). If prices are too low, the inventory is sold out below what it was worth (hurts suppliers) and people who wanted that product at that price are SOL (hurts consumers).

In a crisis, there is an increased demand for certain products, like plywood. Because no one has a magic wand to make more plywood appear instantaneously at the same cost as the existing plywood or less, supply is limited. How do we determine who gets this plywood? Market Economists will say the people who value it the most: the people who will pay the most for it. At first this seems unfair. Why should people with more money get things that poorer people need too? The answer to this good question is another good question: Why should people who wanted this plywood be unable to buy it when supplies are gone? Artificially low prices produce a shortage. If there is a demand for 15,000 sheets of plywood and only 5,000 available, what is the moral difference between allocating them to those willing to pay a higher price: say $15 per sheet, instead of those people lucky enough to grab the same sheets at $5 per sheet? In fact, I suggest the former is preferable, because then the supplier gets the full value of those 5,000 sheets.

Apply this principle (higher prices lead to fewer people consuming a good or service until a balance is reached) to the gas pump. Why is it fair for prices to go up, even when the cost per gallon is the same? (1) Because people are willing to pay it. (2) Because if gas prices are shooting up in response to high demand (in this case, panicked car buyers topping off their tanks upon hearing that oil hit $70 per barrel), increased prices both restrict demand to ward off a shortage and provide the full value of that gas to the person who had to pay for it so he could sell it to you.

I heard about people who in the aftermath of Hurricane Andrew purchased generators from areas that had them north of Florida, transported them into Florida, and resold them at significantly higher prices. These people were seen as evil vampires, preying on human suffering. I see them as people providing additional generators, at a price people are willing to pay, to a market that has none because prices were too low.

What's wrong with more generators ending up in a place where they are needed, resulting in the profit of those who saw the need and moved to fill it?