2/15/2007

They Clapped

I recently read an article found on The Library of Economics and Liberty website. The article was entitled, "They Clapped" and addressed the issue of price gouging. The author addressed a situation in North Carolina that happened to his family in 1996. The situation took place after a hurricane ripped through the area and claimed a lot of property and goods from the local populous. North Carolina had laws that prohibited people from selling a good to the victims of the hurricane for any more than 5% above the usual price. Well some people from a neighboring community heard that the residents in Raleigh needed ice, so they loaded up their truck with ice and headed to Raleigh to make money. Many residents lined up to buy ice and some were upset that the people were selling ice for $8 a bag, which was obvious price gouging. Someone reported the deliverers to the police and the individuals were arrested. The author was upset with the situation not because of the price, but because people cheered as the deliverers were incarcerated. The laws prohibiting such gouging prices kept a lot of people from receiving ice that they needed. I agree with the author in that the people who needed the ice would have paid any price, but I do not agree with astronomical price gouging. I do not think that the government needs to regulate the market so tightly that nobody wants to provide the goods or services. People would rather deal without than pay the higher price. I also agree that the prices would be driven back down again if government would have allowed more entrance into the market. Businesses would want to make money and not lose it to some other guy who went down with the same idea, so one seller would drop prices, the others would follow and the war would go on like everywhere else. The regulation of the government has cut the competition out and set up a virtual monopoly after a disaster, and therefore, nobody wants to help in the cause. Perhaps government needs to regulate certain sectors like power and other necessities, but not luxuries like ice. However, where do we draw the line?

3 comments:

Aaliyah said...

"They" had every right to clap! If your neighborhood had just been destroyed by a natural disaster- your world rocked from its foundations- you would have been wroth, to say the least, that someone would try to make a fortune at your expense, and the expense of your friends and family. Your natural disaster is their gold pot? Doesn't quite sound correct does it? The government should not interfere with correctly working markets, but when markets become temporarily disturbed by such things as natural disasters, it is the governments duty to protect its citizens from predatory pricing, until the market realigns itself.

Kate said...

The policy that North Carolina had with price gouging seems to be proper. Jessica states that maybe there should be a line between luxury and necessities. The ironic thing is that many consider ice a necessity, if we recall the idea of the ice box, it keeps food from spoiling. In a disaster, would not that be a necessity? So my line would be drawn differently then Jessica’s line. That is why I agree with the line that North Carolina has drawn, or should we consider it an all encompassing circle? It works because it is limited to times of crisis.

Dr. Tufte said...

People get very overwrought about this sort of thing.

Let me rearrange this a bit.

Think about this in terms of reservation prices.

If we asked the people from outside the area what their reservation cost was for selling ice before the hurricane, no doubt they would have said some high value. That is why they were not in the ice business. Now that the situation has changed they are selling ice. What is wrong with that?

Alternatively, what is the reservation cost to sell ice right now for the people whose homes were damaged? My guess is pretty high - which is OK too.

Here's the problem though. The people with the highest reservation cost are complaining about the people with the middling reservation cost, because they aren't selling ice at the low reservation cost that 1) they never did sell it at, and 2) that other people who are no longer around used to sell it at.

Correct me if I'm wrong, but this is appalling. Unfortunately, we're too polite to criticize people whose homes have been recently wrecked.