Are Price Gougers Evil?

Column for week of July 21, 2014

     The label "price gouger" is often hung on those who
suddenly raise prices.  Politicians threaten price gougers.  There
is a strong myth that prices should be limited to about the cost
of production.  The person who charges more is seen as evil.

     Buyers' willingness to purchase, not cost of production,
limits prices.  All sellers can do is refuse to sell until offered
prices they want.  It matters not that it costs the producer $1,000
to make a chair.  If no one will pay more than $100, the chair
remains unsold until the producer drops the price.  I have heard
very little vilification of buyers who refuse to pay the producer's
cost of production.

     Buyers just don't care when producers lose money.  Yet,
if a producer manages to sell for $1,000 chairs that cost only
$100, the chair buyers are likely to be incensed.  If the chair
wasn't worth $1,000 to the buyer, Why did he pay $1,000?

     The mere fact that something has a price means it is in
short supply.  If there is enough for everyone the price will be
zero.  If you doubt that, try selling bags of air.

     Most things are in short supply.  If the prices fell to zero
the entire supply would be quickly claimed by someone. 
Everyone would be staring at empty shelves.  For most things
the price need not fall to zero to empty the shelves.  Suppose
that all stores cut their prices by 90 percent.  What would be left
after a few days?

     This happens with various video games and toys.  The
shelves are always empty, except briefly after new shipments.  If
sellers raised prices, demand would drop.  The item would
always be available for those willing to pay higher prices.

     There isn't such a thing as intrinsic value.  Value is
purely an opinion.  Each of us have our own opinions about
value.   These opinions vary greatly and endlessly change.

     When supply equals demand there is just enough
available for each person who wants to buy.  To achieve that
balance prices must adjust so supply will just meet the demand
of those who value the item enough to pay the price.  Higher or
lower prices will cause surpluses or shortages.

     Sellers usually seek to find prices that balance supply and
demand.  If the price is too low, buyers who don't value the item
enough to pay more still buy.  Soon even buyers who value the
item more are unable to buy because nothing is left.

     When supply suddenly decreases, or demand increases,
the price must rise to keep supply and demand in balance. 
Supply limits the number of purchases possible.  Some potential
buyers will be disappointed.  The only question is which ones?

     Consider gasoline.  If supply drops and the price doesn't
change, people who place a low value on gasoline will buy until
the supply is gone.  Then no one buys.

     If gasoline price rises from $2.00 to $10, only those who
value gasoline more than $10 a gallon will buy.  Those who
would have bought 20 gallons may now only buy three. 
Gasoline remains available for those who value it more than $10
a gallon.  Instead of the scarce gasoline being used for trips to
the video store and ball games it is available for emergencies
and driving to work.

     The so-called price gouger acts on the spot to insure that
consumption is limited to its most valuable purposes.  Long
before the government showed up with ration books and threats
to control consumption, the gasoline would be gone.

     In addition, higher prices for gasoline provide both
incentive and resources for suppliers to increase supply.  If the
price remained at $2.00, supplies would disappear and there
would be little incentive to incur higher costs to replenish them.

     Those who drastically increase prices in the face of
sudden changes in supply or demand aren't gouging anyone. 
They sell only to willing buyers.  They also provide valuable
services by allocating the product to those who value it most.

aldmccallum@gmail.com
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Copyright 2014
Albert D. McCallum