In praise of price gouging

As someone trained in economics, I look at the world differently than the average layman. One good example of this contrast is businesses increasing their prices in the wake of disasters such as the recent Hurricane Katrina. Most politicians naturally pander to the populist outcry by taking legal actions against such profiteering.

 

I beg to different with that approach.

 

I, along with many economists, happen to believe that profiteering is not only a good thing, but necessary in order to efficiently allocate resources. David Milton wrote about grain speculators in his book Hidden Order: the Economics of Everyday Life. He wrote that many hold such speculators in contempt because they take advantage of price swings to make profits and capitalize on citizens’ need desire to feed their families. But he also points out that these speculators help minimize the fluctuation in food prices by purchasing when prices are low (helping drive prices up) and selling when prices are high (helping drive prices down).       

 

David Leonhardt wrote an excellent column in yesterday's New York Times about the societal benefits of allowing prices to reach their natural equilibrium.

After Hurricane Katrina blew through the Gulf Coast, the price of lumber and other building materials shot up. Demand for these items was suddenly higher, and the people who sell them knew that they could charge more. So they did, in what seemed to be - and may, in fact, have been - an act of pure greed.

But it was also an act that hadsome clear benefits for society. With the cost of renovations now higher, some homeowners will delay their projects until the prices come back down. That will make more materials available for New Orleans and will also help reduce prices. It's the market economy's version of a virtuous cycle.