MYTH: Price-Gouging Is Bad


May 12, 2006 — -- How could that be a myth? Everyone agrees that if a seller greedily doubles prices after a hurricane, it's not only bad, it's immoral. People say that about today's gas prices.

But wait a sec, what, exactly, is gouging? People say it's raising prices too much, but who gets to decide what's too much?

Most states have anti-gouging laws.

Mississippi Attorney General Jim Hood announced a crackdown on gougers after Hurricane Katrina.

John Shepperson was one of the "gougers" authorities arrested. Shepperson and his family live in Kentucky. They watched news reports about Katrina and learned that people desperately needed things.

Shepperson thought he could help and make some money, too, so he bought 19 generators. He and his family then rented a U-Haul and drove 600 miles to an area of Mississippi that was left without power in the wake of the hurricane.

He offered to sell his generators for twice what he had paid for them, and people were eager to buy. Police confiscated his generators, though, and Shepperson was jailed for four days for price-gouging. His generators are still in police custody.

So did the public benefit? Here's the real question: What is the best way to deal with shortages after a natural disaster?

"Any time there is a natural disaster, or a hurricane, an earthquake, the price of the things that people desperately want to have -- batteries, flashlights, generators, water or milk -- they go up. Or they disappear," said economist Russ Roberts.

If sellers don't raise prices, supplies vanish. Anxious buyers line up and often buy more than they need, just in case. Those not at the front of the line may get nothing.

"More people want to buy it than there is stuff available. … What do you do? How do you solve that problem? And how do you find out who should get those scarce items," Roberts asked.

The answer is you allow people to raise prices -- even to "gouge" -- because only people who REALLY need them will cough up the money. Gouging also encourages greedy entrepreneurs to rush in with much-needed goods, or to look for more supplies.

The politicians' typical solution is anti-gouging laws or capping prices. During the 1970s gas crisis, that's what the government did. What happened then?

"It was a disaster. It led to long lines, and you couldn't get gasoline," Roberts said.

Today's fat oil company profits have led many to scream that they're gouging, but the higher prices are a signal to oil companies to drill for more oil.

"The high price is a big flag that's planted in the ground that says, 'Hey, come over here and make money,'" Roberts said.

Then people rush supplies in, and soon, prices come back down.

You might not believe me or even Roberts that gouging is good, but will you believe Nobel Prize-winning economists Gary Becker, Vernon Smith and Milton Friedman? All three say gouging is good, and call it the best way to get important supplies to people who need them.

Economists we talked to say Shepperson's a hero and that his entrepreneurship should be encouraged, not prosecuted.

Hood defends his state's anti-price gouging law and said he's just doing his job by enforcing it. "Look, my job is to enforce the law. Our law says that you cannot increase your profits once a state of emergency has been declared," he said.

"People want to live in a world, where love is what motivates people to help others. And love does that. But there isn't enough love to go around. And love for strangers isn't gonna motivate enough people to get in their trucks, to load 'em up with generators, and take 'em down to help people who are cold and hungry," Roberts said.