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The internet has been full recently with 'articles' discussing price gouging. The problem with the overwhelming majority of them, however, is that they tend to focus in on one very small aspect of the issue, get it wrong, and ignore the rest of the issue. They tend to focus on 'the price'. One meme that I saw recently had a picture of two pallets of water bottles. The one said 'two dollars each' and had no water bottles left. The other had a sign which said, "fifty dollars each", and was still full. The meme, written by a libertarian, encouraged you to see that when a price is set too low in an emergency, the article sells out quickly and is thus not available.
But the meme was missing a pallet. Let's label this pallet 'ten dollars each' and show it with a quarter pallet left of bottles. Because that is the reality of 'price gouging'. Laws against price gouging, and foolish 'compassion' on the part of shop owners, produce the empty pallet of bottles sold at the regular price. But only an idiot would try to sell water bottles at $50 for longer than the few minutes it took to see that… they weren't selling. Only an idiot would end up with his pallet full during the event.
And not only is that meme wrong, and so much of the discussion that goes along with it, but it isn't the whole story. I have tried, here, to tell 'the whole story'.
The following article has the following thesis: That what it typically called 'price gouging' is a good thing. That it has both short and long term beneficial effects.
By 'price gouging' I mean: A legal system and attitude of merchants that not only allows for but encourages the raising of prices and increasing flexibility of supply during a disaster. This needs to be supported legally by the elimination of laws and regulations, at the very least before, during, and after a natural disaster, that regulates such things such as who can buy and sell, how many people a hotel can put in a room, what kind of room constitutes a hotel room, etc.
The hero in the following story we will call the 'Greedy Gouger'. For the purposes of the article you can feel free to assume that he is motivated solely by greed. You also need to assume, however, that he is a local merchant or local resident who cannot afford to operate fraudulently or with careless disregard, lest that come back to haunt him long term. Far from being in opposition to greed, being honest and acting with regard for one's customers is part of how an intelligent 'Greedy Gouger' works.
The out of town 'greedy gouger' is a little more ambivalent. When dealing with an out of town greedy gouger the buyer needs to be extra careful, because he is not as motivated by concerns of 'reputation'. However even the out of town greedy gouger adds to the beneficial nature of the price gouging.

Let's see how this works in a timeline. The weather channel reports and upcoming potential disaster. Say a storm looming off the coast of Texas, just to pick a possibility at random πŸ™‚ …

  1. The Greedy Gouger hears that a disaster is possible, forecast for a few days away. He immediately begins laying in a stock of materials in the days before the price or the difficulty of gathering materials rise that he hopes to be able to sell at an extra profit . He raises his prices mildly on the kinds of goods he is ordering in order to preserve his supply and to begin making an extra profit.
    The public is annoyed at the rise in prices, so he has to be careful. But people also stop buying these materials for ordinary uses unless they are very important. They buy them for disaster uses, but at a lesser rate than they ordinarily would (or they buy them at another store). The rise of prices also signals to the public that a further rise might be coming, and thus encourages them to purchase and prepare early.
    -Public good: The use of materials important for this disaster begins to be diverted from the ordinary to the important. People are encouraged to prepare early for the disaster, and not to assume that materials will be cheaply available during the disaster.

1b) The disaster does not happen and he has a sale to get rid of extra inventory.
-Public good: an occasional sale πŸ™‚ If the Greedy Gouger was able to sell enough to make a profit, he will be encouraged to repeat the process next time.

  1. The disaster nears, and the Greedy Gouger raises his prices even more. This continues to limit the uses to which these materials will be put, with only the very rich buying for ordinary uses. People start thinking about alternate methods of obtaining these materials. They might fill their own old bottles with water, for example. Or tear apart an old shed to use the plywood for windows.
    -Public good: The use of materials is diverted from ordinary or even important to vital. People begin to think about, and use, alternate, more readily available, materials instead of materials important to the disaster and with a limited supply. People are again impressed with the need to prepare early as they see prices rise.

2b) The disaster is averted, and he has a sale to get rid of extra inventory.
-Public good: Another sale. If the Greedy Gouger was able to sell enough to make a profit, he will be encouraged to repeat the process next time.

2c) If the public buys the materials even at the increased price as they see the disaster approaching, then the Greedy Gouger, seeing his supplies diminish while his bottom line increases, reaches out to his suppliers or other suppliers, offering them more money or other incentives to increase the supply of goods. He also continues to raise his prices.
If the public does not buy at the price offered, the greed gouger begins to lower his prices.
-Public Good: Supply of materials to a potential disaster area increased, even while their use is more and more limited to more and more vital areas. The price is adjusted so that the materials are able to be used, even while their use is restricted.

  1. The disaster hits. The Greedy Gouger is more likely to keep his shop open, in order to sell goods at increased prices. He has to pay his workers more to keep working, as they wish to be with their families. He may even have to make space available for the workers and their families in order to keep them working.
    -Public good: Goods are available for urgent and emergent needs even during the disaster when possible. Workers and their families are kept in place when possible to keep vital functions working.

3b) If the public does buy materials during this time, the Greedy Gouger does his best to gain sources of supply, even at increased prices, in order to sell even more at the higher price.
Public Good: The supply of materials to a disaster area is increased.

3c) If there is more than one Greedy Gouger then prices will not be able to rise as fast, as the various GG's compete, price wise, with each other.
Public Good: The supply of vital goods is increased, while prices are kept down.

  1. The disaster begins to relent. The Greedy Gouger has materials available at a high price. If possible he has workers ready to serve the public. If he does close, it will be for the minimum time.
  • Public good: Goods are available for urgent and emergent needs during a disaster.

4b) If the public does buy materials at the high price during this time, the Greedy Gouger does his best to gain sources of supply, even at increased prices, in order to sell even more at the higher price.
-Public good: The Supply of materials is increased.

4c) If the public does NOT buy materials at the high price during this time, the Greedy Gouger lowers his price until the materials start to be sold.
-Public good: The price of materials decreases even while the supply remains high, allowing the rebuilding to be done more easily.

  1. The disaster is over, and the rebuilding begins. The Greedy Gouger has materials available at a high price, but he is paying a lot of attention to their sales. As sales begin to drop off, he lowers his prices and decreases his supplies, so he doesn't get stuck with extra goods.
    -Public good: The supply of materials matches the demand for those materials. Materials are only used for urgent and emergent needs until the supply chain is fully restored and/or the need diminishes, thus materials remain available for those needs. As prices fall, rebuilding is made easier. Eventually the area returns to normal in terms of prices and supply.

5b) When sales drop way off, the GG is likely to have a sale to decrease his inventory back to normal levels.
-Public good: a sale!

  1. After the disaster is over the Greed Gouger, having gained such a profit from his activities during the disaster, increases his capabilities to do the same thing in the next disaster. Perhaps he implements an automatic increase in hurricane supplies prior to hurricane season. Perhaps he builds extra rooms on his hotel.
    -Public good: The disaster area and surrounding areas become more able to handle a disaster if the 'Greedy Gouger' has his sway. Supply chains, hotel rooms, everything is increased or streamlined or made 'disaster worthy'. Neighboring areas learn of the profit that might be made and plan for it.

6b) After the disaster is over the public having had to pay greatly increased prices during the disaster, reevaluates their ability to live in this disaster prone area. If the area is only mildly disaster prone (this is the first such disaster in 100 years, for example) then they chalk this experience up to, well, a disaster. If, on the other hand, this looks to be something that will happen frequently, they may move away if they cannot afford these kind of events.

-Public good: actual cost of living in disaster area passed on to consumers, thus fewer people live there, or only people who are very useful there, who can afford to live there, or who are able to take precautions to minimize the effect of the disaster.
Another public good that will seem 'bad' to many people is that land prices in the area may very well fall, making the area 'affordable' to poorer people. While others may find their choice objectionable, these people make the decision that a present good (cheaper housing) is better for them even in the light of a future bad (disasters). It may also be that they don't have much to lose in a disaster. They may, for example, rent the house they live in, thus are passing many of the expenses (rebuilding, etc) on to the landlord, who is better able to prepare for such things.

Conclusion
The public goods caused by the Greedy Gouger fall into two categories: short and long term. By Short Term I mean those good effects that occur during the immediate run up to the disaster, during the disaster, and during the immediate after effects. By Long Term I mean actions take between disasters that will end up mitigating a disaster when it occurs.

-Short Term Public Goods
a) Signaling: Price rises before, during, and after a natural disaster serve as a signaling device to consumers that there is a problem with supply. This may help them prepare earlier than they would otherwise, including the purchase of important items at the very hint of a possible disaster.
b) Shifting: Price rises before, during, and after a natural disaster will cause consumers to shift their uses of a given material from the unimportant to the important, thus preserving supplies for others important needs.
c) Increasing Supply: Price rises, and thus profit rises, before, during, and after a natural disaster will encourage retailers and their suppliers to increase supplies of those materials to the area in order to maximize their profits. This increases the supply of materials to an area that needs them.

-Long Term Public Goods
a) Decreasing Demand: One overall effect of the work of the 'greedy gouger' during the natural disaster will be to encourage those who cannot afford the true costs of a disaster to live elsewhere. This will help minimize the effects of the disaster, as fewer people, or at least fewer people unable to stand the effects of a disaster, will end up living in a disaster area.
b) Increasing Supply: The second, almost contradictory, effect of the work of the greedy gouger will be to increase the availability of supply to areas affected by natural disasters. The occasional windfall profit from those areas can be factored into the total gain/loss calculation, and thus those who provide materials to those areas will be encourage to increase their availability.
This effect will not only apply to retailers and their suppliers, but will apply to ordinary citizens. Knowing that the price on, say, batteries or bottled water, will dramatically increase during the run up to a disaster, the ordinary citizen can arrange for some backup or other method of supply.

Appendix and footnotes.

The role of price increases: Price increases act as signaling mechanisms. When the price rises on a good the people who would otherwise have bought the good for a mundane, unimportant, use now 'think twice' before using it, and only use it for uses they now consider important enough for the new price. The overall effect is that when prices rise, the goods are used less, and only for more important uses (ones where the consumer is willing to pay more).
A trivial example of this would be the difference between a restaurant like 'Chez Emmanuel' and McDonalds. A young man may be willing to stop by McDonalds at pretty much any time with any old bunch of his friends, or even coworkers, because of their low prices. However he is probably not willing to go to the expensive French restaurant 'Chez Emmanuel' except on a date with a girl he really likes: i.e. he only goes there for a meal that he considers 'important', while he will go to McDonalds for meals he considers 'unimportant'.
Similarly a man might be willing to buy expensive plywood for a large, expensive window at the front of his living room, where the piano is; but he might just use some Duck Tape on a small, cheap, bathroom window.
If that same plywood was cheap (say he had a stack of old plywood sitting in his back yard) he would use it on every window.

Hotels: Increasing the profitability of hotels along an evacuation route will increase the number of hotel rooms along that route, as well as the hotel's flexibility in providing housing during disaster. They might, for example, have plans and equipment in place to turn 'meeting rooms' into hotel rooms. They might make arrangements with local restaurants to provide food for their guests. Etc.

Emergency supplies:
These come in three types: Before, during, and after. Obviously some supplies can be good during all three times.
Before supplies are those that help you prepared for the disaster. Plywood to board up windows is a classical disaster.
During supplies are those needed during a disaster.
After supplies are those needed to ...

VonO 7 Mar 7
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