Is an Increase in Demand is “Price Gouging” ?

Keeping with the recent theme of price adjustments, or lack of them, today we are looking at one of the expected results of hurricane Sandy. An article on Yahoo! Finance’s ‘The Daily Ticker’ suggests that retailers in the Northeast United States were ‘gouging’ customers trying to purchase gas, water, food and batteries ahead of the hurricane.

The confluence of Hurricane Sandy and a strong nor’easter (as they are known) was predicted to create a massive storm over the densely populated regions of the US North East. These predictions started a week to 10 days before the storm actually hit. Hurricane force winds reek havoc with power lines and widespread power outages were expected. Hurricanes also cause storm surges, abnormally high water levels and big waves. Flooding was expected in all coastal areas.

The 50 million people that faced the potential for flooding and power outages all went to try and purchase emergency supplies at the same time. The demand for these items increased. The free market reaction to an increase in demand is an increase in price. If prices don’t rise, shortages will occur. See our previous posts on bacon and disposable diapers. This increase in price is not ‘gouging’, it is a natural reaction to an increase in demand.

In several areas there are laws against price gouging by retailers during a disaster. For example, in New Jersey prices are not permitted to rise by more than 10%. North and South Carolina both have similar laws. The general argument is that consumers should not be ‘ripped off’. But, as I teach my students, demand is defined as how much consumers are willing and able to purchase at every price. When a storm is approaching, their willingness to purchase increases – they are willing to pay more. Politicians call it gouging, economists call it equilibrium pricing.

If effective ‘price gouging’ laws are in effect, the amount that consumers are willing to purchase will be greater than what firms have available for sale and there will be a shortage. Some lucky customers will be able to purchase some batteries, or water, then stand outside the store and when the store runs out, the lucky ones will be able to sell their batteries and water at higher prices. (Sounds like ticket scalping for sporting events and concerts, doesn’t it?). The reality is that the equilibrium price must rise. The only question is who is going to benefit, the store owners, or the battery scalpers.