“The American people will never knowingly adopt Socialism. But under the name of ‘liberalism’ they will adopt every fragment of the Socialist program, until one day America will be a Socialist nation, without knowing how it happened.”

Socialist Party presidential candidate Norman Thomas

Tuesday, August 24, 2010

In defense of price gouging

You probably have heard about the traffic jam in northern China that has lasted for 9 days. Because of construction and the recent discovery of huge coal deposits in that region, traffic has increased 40% every year and the roads cannot handle that volume.

As stranded motorists wait, local villagers sell them food, water, games to play, etc., but at highly inflated prices. This has resulted predictably in some stranded motorists complaining about the gouging, in the same way our media whine about price gouging during every weather catastrophe.....

From CBSNews -- Though there were no reports of road rage violence, drivers complained about price-gouging by villagers who were their only source of food and water. A bottle of water that normally costs 1 yuan (15 cents) was selling for 10 yuan ($1.50), while the price of a 3 yuan- (45 cent-) cup of instant noodles had more than tripled, media reports said.

"A boxed lunch is 10 yuan ($1.50), and one box isn't enough for me," China National Radio cited a driver surnamed Lu as saying. "I'm spending up to 50 yuan (about $7.50) a day on food. It's more expensive than eating in a restaurant."

First, in situations where the demand is large and the relative, local supply is small such as hurricane disasters and 9-day, rural traffic jams, prices necessarily should go up. If bottled water, for instance, stayed the same price, the stranded truckers at the front of the line might scarf up all the water for themselves and nobody else would get any. If prices are higher than normal, each motorist only gets what he really needs and everybody gets some water.

Further more, the high prices and resulting profit motive induce other vendors to enter the bottled-water market catering to stranded motorists. This increases the supply and increases competition among sellers and the price goes back down to an equilibrium. Price fixing during times of trouble encourages hoarding which causes many to do without.

Which is better, (a)everybody gets a little of what they need but at a temporarily high price, or (b)a few people hoard everything because they can afford the artificially low price and leave nothing for everybody else?

If you answered (b), then you are a moron!

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