John Sheperson is a hero. When Hurricane Katrina struck, he turned on the news and learned that people in Mississippi had lost electric power. They desperately needed generators. He decided to help them, while helping himself.
He borrowed money, bought 19 generators, rented a U-Haul and drove it 600 miles to Mississippi, where he offered to sell the generators for twice what he paid for them. Eager buyers surrounded his truck. "People were excited," he said.
So did the generators go to hospitals? To nursing homes? Did they save lives? Did Mississippi officials give Sheperson a medal?
Nope. Instead, they locked him up -- and his generators, too.
"Nobody got any use out of them," said Sheperson.
After Katrina, Jim Hood, Mississippi's attorney general, launched a crusade against "price gouging." "For people to take advantage of those in need," he said, "violates every biblical standard of morals that I'm aware of."
The Bible does say, "Give to him that asketh," and if Sheperson had donated those 19 generators and had hauled them down to Mississippi as an act of charity, it would have been fine with Jim Hood. But the attorney general considers making a profit by selling to the desperate at so-called "gouging" prices immoral and illegal.
But making money isn't evil, it's good. Modern life is made possible by people working to make money. And making a profit by "taking advantage" of people in need by meeting their needs is even better.
Today we hear about "gouging" at the gas pump. But it's simple supply and demand. Those "greedy" oil companies don't search for oil and drill for it out of the kindness of their hearts. They do it to make money, just like John Sheperson. The hope of fat profits is what motivates them to take risks to find new sources of oil to meet our energy needs. If companies think the government will "cap" prices to keep profits "fair," they would have little incentive to take the risk.
"Gouging" prices are made possible by extraordinary need -- by times when people decide that it's so important to get a generator that they're willing to pay twice the normal price. This free trade makes both parties better off, or they wouldn't agree to it: Taking advantage of someone's extreme need means meeting someone's extreme need and getting fairly compensated for the unusual effort you had to make in order to do it.
George Mason University economist Russ Roberts points out that if sellers don't raise prices after a disaster, supplies vanish. Anxious buyers often buy more than they need, just in case. Those not at the front of the line may get nothing. "How do you solve that problem? And how do you find out who should get those scarce items?"
One way is rationing -- have the government decide who gets what. Another way is to make people wait in long lines and let patience and luck determine who gets the goods.
But the best way is to give the items to those who are willing to pay higher prices. It's best because it directs supplies to those who need them most and because it inspires more people to take the risks John Sheperson took, or invest in finding new sources of (or replacements for) oil. "High prices are good because what they do is they give people -- and companies -- the incentive to bring supply in ... and help people in the time of crisis. Without that price increase, who has the incentive to bear the risk of stocking up to take care of people?" said economist Roberts.
You may not believe me or Roberts when we say "gouging" is good, but will you believe three Nobel Prize-winning economists? Nobel Laureate (1992) Gary Becker says "gouging" is the "fairest and best" way to get supplies to those who need them the most. "That's a good thing," added Vernon Smith (2002). And Milton Friedman (1976)?
"The 'gougers' deserve a medal."