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Who's doing the gouging?

September 16, 2008 - Lee Smith
When natural disasters like Hurricane Ike strike, politicians waste little time before they jump up and down about "price gouging" taking place. People who seek hotel rooms, gasoline or materials for repairs can suddenly find themselves facing higher prices than they normally would see. They don't like it. Politicians howl because they like getting those people's votes.

But the true story of "gouging" needs to be told. If retail prices did not rise with the sudden demand, there would be shortages of goods. Think of a hotel. Let's say the "normal" price is $50 for a room. What would happen if the price didn't move upward in the wake of higher demand? If you were seeking a room, you might be inclined to take two, or three. Maybe you want all your family members to get their own room. Or you might like to rent the rooms and then turn around and charge somebody else for them. Nice racket for you, eh?

But what if the price for a room were $200? You'd probably only rent one. And this would keep other rooms open for other families in need of shelter. Would the hotel profit? Yes, for a few days. But so what? You have traded value for value. Money for shelter in this case. Both sides benefit. It's not like you're going to live there forever. You probably appreciate the fact that at least you have a warm, comfortable place to ride out the storm.

Prices also must rise in order for more goods to flow into the affected area. When prices go up, people envision profits. They send in goods to sell. But all the goods end up bringing prices back down. This is a double win. Prices stabilize and the needed materials arrive quickly.

Again, the alternative is shortages. That is the general history of price controls.


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