Last week, my economics class discussed price gouging.
Apparently some gas station owners are being prosecuted for raising gasoline prices before and after Hurricane Katrina.
As you probably remember, few offenses were more reviled post-Katrina than gas price gouging. Politicians staged witch hunts, railing against the wicked oil industry and its unquenchable lust for profit.
Of course, the media instantly vilified any suppliers accused of raising prices because "it's just not fair!" The gas price gouging bandwagon was crowded, and the American people had a window seat.
The truth behind the hype is that price gouging is a myth. In a free market like ours, the government does not need to ration products because prices do that automatically.
When the price of a good increases, people generally buy less: natural rationing!
How does this work? Well, normally, if a product is scarce, the demand will be higher, and the seller will charge a higher price.
For example, diamonds are scarce, in high demand and consequently, expensive. I've never heard of widespread diamond price gouging.
My professor had a great example to illustrate this point. Imagine that you need to walk from North Complex to Slagle Hall in the rain. That's quite a trek in a downpour.
Suppose I stand at the entrance to the dorms with a box of $2 umbrellas, selling them for $10 each. Am I gouging the price? No.
You see, I'm not forcing you to buy the umbrella. Of course, we both know that you could get the very same umbrella at Wal-Mart for $2.
If you think convenience and dryness are worth those $8 extra, buy an umbrella from me. If not, then don't. It's your choice.
See what's happening? My price for umbrellas is essentially rationing them, because only those who really want or need umbrellas will buy from me.
But how does all this relate to gas prices?
Suppose you own a gas station. The day before the landfall of a major hurricane like Katrina, you look out the window to see line of cars around the block waiting to pump gas.
You don't know how long your supply of gas will last. What do you do?
Well, think about it. The demand for gas is suddenly way up, but your station has a limited supply. What's worse, you have no idea when the next shipment will arrive.
The only way to ensure that people who really need gas can get it is to raise the price.
People who truly need the stuff will grudgingly pay a few bucks more; those who are just freaking out over the hurricane will go find cheaper gas.
In the words of economist Jerry Taylor, "People who value gasoline most are willing to pay higher prices than those who value it less. The former get the gasoline; the latter to some extent go without."
This is my point. Even though the thought of paying extra often leaves us fuming, "price gouging" is what naturally occurs when demand rises and supply remains fixed.
In a free market, higher prices do not necessarily cheat customers out of money because customers have the simple freedom to go elsewhere. You can either buy that umbrella from me or go to Wal-Mart.
So, if you buy a product at a higher price than normal, you either truly value it or don't want to shop around.
If you end up paying too much, don't get mad. It's not the government's fault that you didn't shop around. It's yours. Live with it.
Reach columnist Matt Hittle at mhittle@usd.edu.
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