The fallout from Hurricane Katrina has featured a lot of ignorance and demagoguery about prices. Let's look at some of it. One undeniable fact is that the hurricane disaster changed scarcity conditions. There are fewer stores, fewer units of housing, less gasoline and a shortage of many other goods and services used on a daily basis. Rising prices are not only a manifestation of these changed scarcity conditions, they help us cope, adjust and get us on the road to recovery.
Here's a which-is-better question for you. Suppose a hotel room rented for $79 a night prior to Hurricane Katrina's devastation. Based on that price, an evacuating family of four might rent two adjoining rooms. When they arrive at the hotel, they find the rooms rent for $200; they decide to make do with one room. In my book, that's wonderful. The family voluntarily opted to make a room available for another family who had to evacuate or whose home was destroyed. Demagogues will call this price-gouging, but I ask you, which is preferable: a room available at $200 or a room unavailable at $79? Rising prices get people to voluntarily economize on goods and services rendered scarcer by the disaster.
After Hurricane Katrina struck, gasoline prices shot up almost a dollar nearly overnight. Some people have been quick to call this price-gouging, particularly since wholesalers and retailers were charging the higher price for gasoline already purchased and in their tanks prior to the hurricane. The fact of business is that what a seller paid for something doesn't necessarily determine its selling price. Put in a bit more sophisticated way: Historical costs have nothing to do with selling price. For example, suppose you maintained a 10-pound inventory of coffee in your cupboard. When I ran out, you'd occasionally sell me a pound for $2. Suppose there's a freeze in Brazil destroying much of the coffee crop, driving coffee prices to $5 a pound. Then I come around to purchase coffee. Are you going to charge me $2 a pound, what you paid for it, or $5, what it's going to cost you to restock your coffee inventory?
What about the house that you might have purchased for $50,000 in 1970 that you're selling today? If you charged me $250,000 for it, today's price for its replacement, as opposed to what you paid for it, are you guilty of price-gouging?
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