Price gouging before Irene could have saved us a lot of money

Without minimizing the damage and loss of life that occurred, the hoarding that occurred in the lead up to Irene was, to a large extent, a reaction to an event that turned out to be more bark than bite. Flashlights, C and D batteries and gasoline containers flew off the shelves at record speeds. Lines formed at gas stations. Shelves at supermarkets went empty.

In the end, Irene made suckers out of the hoarders.

Every time a natural disaster occurs or threatens to occur, the issue of price gouging arises. Inevitably, some intrepid business decides to jack up prices on the eve of the impending event. Gouging is commonly understood to be an immoral act and is, for the most part, outlawed and ostracized. But is that common understanding correct? If we take a critical look at the practical effect of gouging, we realize that rather than being an immoral act, it can actually have considerable beneficial effects.

Had price gouging been allowed to occur, gasoline prices, for example, could have spiked to upwards to $20 per gallon. Had this happened, those on the economic margins would have been priced out of the gasoline market. In other words, the poor wouldn’t have been able to afford it. In addition, those who could afford it might have thought twice about purchasing $20 per gallon gasoline, gambling instead on the chance that the storm wouldn’t generate the level of damage the hysteria had led them to believe it would.

In this particular case, the level-headed and those who could least afford to buy based on hysteria would have won the day. The price gouging would have actually saved these people money as they wouldn’t have purchased what was ultimately unnecessary anyway.

As an added bonus for you class warriors, can you guess who would have lost out in this deal? First, the wealthy who could afford to hoard $20/gallon gasoline would be out considerable amounts of money as gasoline plunged back down to its normal market-driven price after Irene. Second, the reputation of the evil corporate vendor who charged the exorbitant prices would be considerably damaged, as the community would no longer trust their prices.

95% of all price gouging is based on hysteria. Should it be allowed, gouging would, in most circumstances, make people more conscious of their purchases and the circumstances around which they were making them. This would lead us all to take a more measured approach to natural disasters rather than simply being swept up in the hype.

Follow Nick on Twitter @Nick_Rizzuto.