The imaginary crimes of price gouging & profiteering

I agree entirely with The Angry Economist once again. Its clear to me that the legislation against "profiteering" and "price gouging" is extremely vague, ambiguous and completely idiotic, being driven by emotion, anger and feel-good sentiments. But it looks like I'm on my own.

The idea, or should I say, the driving emotion, behind the legislation is anger/outrage/envy directed against businesses who seem to raise their prices during times of crisis or natural disasters. i.e "How dare they raise the price of groceries and water and fuel ?"

Leftists will drag out their favorite word when they think they identify this occurring - "exploitation !"

With that word, the alarm bells ring. Journalists and current affairs programs create alarming reports and stories. It only follows naturally for progressives and socialists that government oughtta do something about it.

And don't you worry, the government certainly will. Our bureaucrats and regulators are always happy to define new laws, pass new legislation and invent new penalties for new crimes. So the government goes ahead and criminalises a form of voluntary free trade between 2 consenting parties.

Boy this is stupid.First year economics students would see the problem with this. When there is a surge in demand for something, and the supply is held constant, you either a) allow the price to adjust upwards; or b) see massive shortages.

By making a) illegal, we will certainly see b). Instead of petrol stations selling petrol at double the price to the highest bidders ( those who need it and value it the most ), we see rationing of petrol and huge queues appear - first come first served.

By making a) illegal, we don't allow other providers to scramble madly to enter the market. The signal of abnormal profits is like a red flag to a bull, it tells others to immediately rush to supply the goods in demand and take a share of the profits. Increasing the supply not only brings goods to those who need it during a crisis, but it has the effect of lowering the price.

The Angry Economist echoes my thoughts:

In a crisis, certain resources are scarce. They shouldn't be wasted, and they should go to the people who put the most value on them. The best way to discover who these people are, in a free-market society like America, is to let the price of the resource float. The people who have the highest use will be willing to pay the highest price.

This has several pleasant effects: first, it rewards people who have the good sense to keep these resources in stock, available for other people to use when the crisis hits. Second, it encourages other people to work really really hard to increase the supply of this scarce resource, because they know they'll be rewarded by high profits. Third, the higher the profit, the more the resource will flow into the area where it's badly needed, and the sooner the price will drop down to normal levels.