Price Gouging is a Matter of Perception

The Wall Street Journal ran an editorial earlier this week that essentially said gasoline price gouging in the Gulf region was good for the country. Of course, whenever a labor union tries to gouge shareholders for more than a pittance, the same editorial page is covered with demands to shoot the plebs where the stand. But the question is a valid one; just where does a reasonable mark-up in a shortage situation become unreasonable?

In a market economy, prices largely reflect the perceived future short-term trend of demand and the perceived future short-term trend of supply. In other words, not only does the price of gas in a hurricane zone reflect the current supply and demand situation, but also it reflects beliefs about how much gas will be available tomorrow, and how many people want to get as far away from the hurricane as they can in their SUV.

This is where the concept of elasticity comes into play. If demand for a good or service changes a great deal with a shift in price, it is said to be elastic. If it changes little, it is inelastic. Buyers most often complain of price gouging when demand is inelastic, when the product or service in question is a staple. Food, medicine and the like have rather inelastic demand curves. It is true that people will substitute beans for filet mignon if the price requires it, but when the choice is between food or no food, there is no elasticity. Demand for chewing gum is much more elastic (as is the gum itself); no one lives or dies (not even American teenagers) if they have no Wrigley’s Doublemint.

Gasoline has become a necessity for a great many Americans. The car culture that the world associates with life in the States requires it. And in the case of Hurricane Katrina, a full tank was the difference between making it to the Marriott in Houston or riding the storm out in the Superdome or Convention Center hells. So, if party A needs to fill up the Navigator to survive, why should party B hand over any change from a $100 bill? Surely survival is worth a few extra dollars?

On the other hand, must Americans be so greedy that party B would let party A suffer through a hurricane and its aftermath in sheer misery for the sake of a $50 windfall profit? Couldn’t prices have held steady for safety’s sake? Would more have survived it the gas had been given away?

There are no easy answers, but these questions raise others. Just how important is the market when lives are at stake? And what kind of human beings operate in that market? Neither is an economic question, but rather both are moral ones.


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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