EconVersations: The Economics and Ethics of Price Gouging (episode 114)

Summary

In this episode of 'Conversations,' Dr. Dan Soder and his guests delve into the controversial practice of price gouging, particularly in the wake of natural disasters. They explore the economic rationale behind price increases, the ethical implications, and the public's negative perception. The discussion highlights the role of supply and demand, the importance of price signals in resource allocation, and the potential downsides of anti-price gouging laws, emphasizing the need for competition to naturally regulate prices and encourage entrepreneurial efforts in crisis situations.

Takeaways

• 🌪️ Price gouging often occurs after natural disasters when there is a sudden increase in demand and a decrease in supply for certain goods.
• 🛑 The term 'price gouging' is not just about high prices but is specifically associated with situations like post-disasters or life-saving medication shortages.
• 🚫 President George W. Bush equated price gouging to looting, indicating a strong negative perception among the public.
• 💡 Economists view price gouging as a market mechanism for allocating scarce resources to those who need them most during emergencies.
• 🛒 The public often perceives price gouging as exploitative, taking advantage of vulnerable consumers in desperate need of goods.
• 📈 Price increases are sometimes necessary to cover the higher costs incurred by suppliers to meet demand in disaster-stricken areas.
• 🚚 An example given in the script describes individuals who bought ice at a low price and sold it at a high price after a hurricane, which was seen as price gouging but also as a response to market demand.
• 📉 Laws against price gouging can deter suppliers from increasing supply, which might be necessary to meet the increased demand after a disaster.
• 🤝 The script suggests that competition, rather than legislation, could be a more effective way to control prices and ensure supply.
• 🏥 The case of daraprim highlights the role of competition in preventing price gouging, as the lack of it allowed for a significant price increase on a life-saving drug.
• 📉 The script points out that social pressure and the potential for loss of shareholder value can influence corporate behavior, suggesting a role for consumer activism in preventing exploitative pricing.

Q & A

What is the common public perception of price gouging after a natural disaster?

The common public perception of price gouging is negative, often infuriating many Americans, as it is seen as taking advantage of people in vulnerable situations, such as after a natural disaster when essential goods are in short supply and high demand.

How did President George W. Bush describe price gouging in the context of Hurricane Katrina?

President George W. Bush referred to price gouging as the moral equivalent of looters, indicating a strong disapproval and associating it with unethical behavior.

What is the economic perspective on price gouging, as opposed to the public perception?

Economists approach price gouging differently, seeing it as a market mechanism for allocating scarce goods to those who need them the most during times of high demand and disrupted supply chains.

What is the term used to describe a situation where demand for a good is inflexible, and why is it relevant to price gouging?

The term is 'inelastic demand.' It is relevant to price gouging because it describes a scenario where people will still demand a good even if its price increases significantly, such as in emergency situations.

Why did the students in the script sell ice at a high price after a hurricane?

The students saw an opportunity to meet the high demand for ice following a hurricane, which had caused power outages and increased the need for ice to preserve perishable goods and medicine.

What was the outcome when the students who sold ice at a high price were arrested?

Their arrest led to a negative outcome, as it discouraged competition and potentially prevented the market from self-correcting, which could have resulted in lower prices and better allocation of the scarce resource.

How do supply and demand shocks caused by natural disasters affect prices?

Natural disasters can cause an increase in demand for certain goods, like ice or gasoline, while also disrupting supply chains, leading to a classic supply and demand shock that increases prices.

What is the role of price signals in conveying information about the needs and scarcity of goods in a market?

Price signals communicate the relative scarcity and urgency of goods in the market, guiding consumers' purchasing decisions and encouraging suppliers to allocate resources where they are most needed.

Why do some people argue that arresting price gougers after a disaster might not be the best solution?

Arresting price gougers can discourage others from providing much-needed goods to disaster-stricken areas, potentially leading to a worse-off situation for those affected by the disaster due to a lack of available supplies.

How do price gouging laws, which restrict price increases after a disaster, impact the market and the availability of goods?

Price gouging laws can limit the incentive for suppliers to bring goods to affected areas, as they may not be able to cover increased costs or make a profit, which could ultimately lead to less availability of essential goods.

What is the significance of competition in preventing excessive price increases after a disaster?

Competition is crucial as it encourages more suppliers to enter the market, offering goods at lower prices, which can help drive down prices and ensure a better allocation of resources to meet the increased demand.

What was the daraprim case, and how does it illustrate the issue of price gouging in the pharmaceutical industry?

The daraprim case involved a significant price increase of a life-saving drug from $13.50 to $750 per pill due to a lack of competition. It highlights the potential for price gouging when there is no alternative available, and the importance of competition in keeping prices fair.

How can social pressure and public opinion influence a company's pricing decisions, especially in controversial situations?

Social pressure and public opinion can significantly impact a company's decisions, as seen with United Airlines' stock price drop following a controversial incident. This can serve as a deterrent against perceived price gouging or unethical practices.

Outlines

00:00

🌪️ Introduction to Price Gouging Debate

The script opens with a discussion on the controversial practice of price gouging, particularly in the context of natural disasters. It introduces Dr. Dan Soder and Ashley Lynn, who will explore the topic from both economic and ethical perspectives. The conversation aims to clarify misconceptions about price gouging and its impact on society, highlighting the difference between public perception and economic theory.

05:02

🛑 The Ethical and Economic Ramifications of Price Gouging

This paragraph delves into the public's negative perception of price gouging, comparing it to looting, and the economists' alternative view, which sees it as a market response to supply and demand imbalances. The discussion includes the example of a group selling ice at inflated prices after a hurricane, emphasizing the role of price in allocating scarce resources to those who need them most.

10:04

📈 Understanding the Market Dynamics Behind Price Gouging

The script explains the market forces at play during price gouging, focusing on how disasters affect supply and demand, leading to price increases. It clarifies that it's the disaster, not the seller, that causes the price rise and discusses the importance of price signals in conveying information about resource scarcity and need.

15:05

🤔 The Ethical Dilemma of High Prices During Crises

This paragraph examines the ethical considerations of allowing high prices during emergencies, questioning whether it's right to profit from someone else's misfortune. It also explores the potential benefits of high prices, such as encouraging supply and discouraging unnecessary consumption, which can help allocate resources more effectively.

20:05

🚓 Legal and Social Consequences of Price Gouging Laws

The script discusses the existence of anti-price gouging laws in many states and the challenges of defining 'reasonable' price increases. It uses the example of the North Carolina ice sellers to illustrate the potential negative consequences of such laws, including deterring entrepreneurial efforts and potentially worsening the situation for disaster victims.

25:06

💡 The Role of Competition in Mitigating Price Gouging

This paragraph highlights competition as a natural counterbalance to price gouging, suggesting that in the absence of legal restrictions, market competition would drive prices down. It contrasts this with the situation where a lack of competition, as seen with the daraprim drug case, can lead to significant price increases and exploitation.

🌐 The Broader Implications of Price Gouging on Market Behavior

The final paragraph wraps up the discussion by considering the broader implications of price gouging on market behavior and consumer responses. It touches on the role of social pressure and the potential for companies to adjust their behavior in response to public opinion, as well as the importance of understanding the complex interplay between market forces, competition, and ethical considerations.

Keywords

💡Price Gouging

Price gouging refers to the practice of raising prices on goods or services to a level that is considered excessively high, often in response to a perceived advantage or urgent need. In the video, it is discussed as a controversial act that occurs after natural disasters when demand for certain goods like ice or gasoline surges, and it is exemplified by the story of individuals selling ice at $12 a bag after a hurricane.

💡Natural Disaster

A natural disaster is an event caused by natural processes of the Earth, such as hurricanes, tornadoes, or ice storms, which result in significant destruction and disruption. The video script mentions natural disasters as triggers for price gouging scenarios, where shortages of essential items like power or transportation lead to inflated prices.

💡Market Economy

A market economy is an economic system where the production and distribution of goods are determined by supply and demand, with minimal government intervention. The script discusses how a market economy is disrupted during natural disasters, leading to situations where price gouging can occur as a response to altered supply and demand dynamics.

💡Elasticity of Demand

The elasticity of demand measures how sensitive the quantity demanded of a good is to a change in its price. In the video, the term 'inelastic demand' is used to describe situations where demand for a good does not decrease much when the price increases significantly, such as the need for ice or medicine after a disaster.

💡Entrepreneurial Effort

Entrepreneurial effort refers to the initiative and actions taken by individuals to identify and exploit opportunities for profit. In the script, the story of college students who rented a truck and sold ice at a high price after a hurricane exemplifies entrepreneurial effort, despite the controversy surrounding their actions.

💡Scarcity

Scarcity is an economic concept that refers to a situation where the demand for a resource exceeds its available supply. The video discusses how natural disasters can cause scarcity of essential goods, leading to price increases as a market response to the heightened demand for limited resources.

💡Supply Shock

A supply shock is a sudden and significant change in the supply of a good or service. In the context of the video, supply shocks occur when natural disasters disrupt the normal flow of goods to the market, causing shortages and, consequently, price gouging as sellers try to allocate the limited supply to those willing to pay higher prices.

💡Competition

Competition in economics refers to the rivalry among sellers trying to attract buyers. The script suggests that competition can be a natural antidote to price gouging, as it encourages more suppliers to enter the market, driving prices down to more affordable levels.

💡Moral Equivalent

A moral equivalent is a term used to compare two actions or behaviors based on their moral implications. President George W. Bush is quoted in the video as equating price gouging to the moral equivalent of looting, suggesting that both actions exploit vulnerable situations for personal gain.

💡Risk

Risk is the possibility of an event occurring that will have a negative impact on a goal. In the video, the college students who sold ice took on various risks, such as renting a truck, navigating through debris, and potentially facing legal repercussions, which are all part of the entrepreneurial risk-taking process.

💡Profit

Profit is the excess of revenues over the costs in a business transaction. The video discusses profit in the context of price gouging, where sellers aim to make a profit by selling goods at higher prices than usual. The ethical implications of profiting from disaster situations are also debated.

💡Regulation

Regulation refers to rules or directives made and maintained by an authority. The script mentions that about 34 states have laws restricting price gouging, illustrating how regulation can be used to control market behavior and protect consumers from unfair pricing practices after disasters.

💡Monopoly

A monopoly is a situation where a single seller controls the entire market for a product or service. The video uses the example of the daraprim case, where a single company controlled the market for a life-saving drug and was able to raise prices significantly due to the lack of competition.

Highlights

Dr. Dan Soder introduces the topic of price gouging and its ethical and economic implications.

Ashley Lynn, a senior at Troy University, discusses her research on price gouging and its effects.

Price gouging is defined as the act of raising prices significantly after a natural disaster or for essential medications.

Economists view price gouging as a market response to increased demand and decreased supply, rather than exploitation.

The conversation explores the public's negative perception of price gouging, comparing it to looting.

Ashley Lynn argues that price gouging can be a way to allocate resources to those who need them most during emergencies.

An example of price gouging in North Carolina after a hurricane is presented, illustrating the entrepreneurial response to disaster.

The discussion highlights the importance of price signals in conveying information about supply and demand.

Price gouging laws are critiqued for their ambiguity and potential to discourage entrepreneurial efforts in disaster response.

The role of competition in moderating prices and encouraging supply is emphasized.

The impact of price gouging on consumer behavior, such as making more thoughtful purchasing decisions, is discussed.

The conversation considers the ethical implications of profiting from disaster and the role of social pressure on businesses.

The case of daraprim, a drug with a significant price increase, is used to illustrate the dangers of a lack of competition.

The importance of allowing free market competition to prevent exploitation and ensure fair pricing is stressed.

The program concludes with a reflection on the complex nature of price gouging and the need for a nuanced understanding of market dynamics.

Transcripts

the opinions expressed on this program

represent the viewpoints of individual

authors or contributors and do not

necessarily reflect those of Troy

University

[Music]

hello and welcome to conversations I'm

your host dr. Dan Soder of the Johnson

Center for political economy at Troy

University

it's a scene we've all seen unfold

before a hurricane or ice storm or other

natural disaster strikes a community

disrupting power transportation and our

market economy items that are normally

available are now in short supply and

great demand and then someone starts

selling gas or ice or portable

generators but for sky-high prices this

is commonly referred to as price gouging

and infuriates many Americans President

George W Bush once referred to price

Gaucher's as a moral equivalent of

looters after Hurricane Katrina

economists though approach this matter

very differently and our assessment of

the effects and the efforts of price

colleges affect how we may want to

evaluate the accomplice activity joining

me any conversations today to talk about

the economics and ethics of price

gouging our doctor Dan Smith associate

director of the Johnson Center in Troy

University student Ashley Lynn welcome

back to the show Dan and welcome to the

show Ashley before we get started

Ashley why don't you going to take a

moment to tell us a little bit about

yourself well I'm a senior here at Troy

University double majoring in economics

and math and in the fall I'll be

starting my ph.d program in economics at

Florida State which I'm very excited

about and we're very happy for your

opportunity to go on and study at

Florida State and I just want to

mentioned to viewers that you last year

you won a prize in our sir our College

of Business undergraduate research fair

and for your paper on this topic which

is why we're having on here today to

talk about this this topic right yes sir

so let's get started here and let's make

sure we make sure everybody's completely

aware of exactly what we mean here we're

talking about price gouging because

there could be some clarity sometimes

people will use the term soma casually

or referring to just a price in the

supermarket is price gouging but there

are such things as price gouging laws

and so forth and it refers to a little

somewhat more restricted activities so

tell us a little bit the type of

activity that we have involved here okay

well to me the things that really

signify price-gouging would be higher

prices obviously but they normally come

after a natural disaster

so hurricane tornado things like that or

in the case of like a medication that is

required for survival

some people do consider higher prices on

medication of that sort as price gauging

price counting as well in other people

will commonly refer to this in a

situation of that a great need for the

products a connoisseur of prefer the

term inelastic demand it maybe it's a

little more antiseptic but it also has a

little bit more of a concrete meaning

meaning that well what exactly would

that mean that yeah yeah so all that

means is that people have a really

inflexible demand for that good they

really need this good it's emergency

situation they're they're vulnerable

because they need it could be they need

medicine and after a disaster they may

need ice to keep that medicine cold they

might need gas to put their their tanks

so they could take their their pregnant

wife to the hospital it means they just

have an absolute demand for this good

and that's why people have such this

such a such so repulsed by price gouging

is because they perceive it as taking

advantage of these people in these

vulnerable circumstances where you're

still going to buy the good even if it

goes up in price or even if it's so much

more expensive than it would be

otherwise so and so let's started

getting to this whole issue of the

popular dislike for price gouging or I

mentioned President Bush's comparison of

price gouging to looting now I

understand what looting is and I

understand what what's bad about looting

because you're actually stealing from

people are stealing from stores in the

aftermath of a disaster now what exactly

our price gougers doing and because it

doesn't on the surfaces are they doing

anything that actually this is the same

as looting I would say definitely not

because you know even

when people are considering something

being price gouged they're actually

voluntarily buying that product so

they're not being forced into anything

so even if they do buy it this by their

own choice and so I think that's

something that should definitely be

taken in consideration if they think the

price is too high and it's not a

necessity at the time then they don't

have to spend the money they can wait

until the prices drop back mm-hmm but I

think when people have such a bad

outlook on it is it's because of some

people in are like a vulnerable state

and so they think people are being taken

advantage of when really price gouging

is the markets way in the sense of

making sure that goods are allocated to

who needs the most hmm because if

someone had needs insulin to be iced and

their power's out and that's the only

way their insulin is going to stay good

they're gonna value that ice a lot more

in that situation than a day before when

the ice was just used to keep their

drink cold now that I saw you has

skyrocketed to that individual person so

me who I don't need insulin so that ice

is in the style to thing that's the

person who does need it and so price

counting in it since the higher prices

the person that meets it more is gonna

spend the money on it more and it's kind

of fixing itself in that manner mm-hmm

so just to offer again another concrete

example of this activity professor Mike

Munger tells a is written a story

telling of a instance in the aftermath

of a hurricane in North Carolina from a

few years ago that I think really really

gives a very concrete case of price

gouging activity so if he could dust

tell us a little bit about Mike muggers

okay Sarah okay well it's pretty simple

there was four guys who witnessed I

think it was a hurricane and so they

knew that there was a need for ice

because ice had been sold out and they

were in an area that hadn't been harmed

as much so they had access to

I struck that could keep it cold so they

rented out the truck

they bought 500 bags for about under $2

apiece mm-hmm it was higher close to $2

and then they sold it to people for $12

a bag once they got to Raleigh mm-hmm

and they ended up being arrested and

people cheered and applauded them which

it's kind of crazy because everyone was

made worse off in that situation and I

think some people don't take into

account that $12 seems like a lot but

they also had to pay the price to cover

the ice-truck they had to pay the gas to

get there they had to pay for their time

compensation to make it worthwhile even

though it is the goodness of their heart

it's not really fair to put someone off

make them worse off to help someone else

and so then once those crosses were

covered then they charged the higher

price but in the long run if they

wouldn't been arrested it would have

created competition and the prices

probably would have gone down and so

being arrested really was probably the

worst solution that could have happened

and that's an area so you say you these

people took an entrepreneurial effort an

action they saw the opportunity they

went there and I might add to the story

a detail I remember from this case was

that they actually had to take chainsaws

with them to cut some trees and branches

that were blocking the highway so that

they could get to Raleigh and get in

with the ice so that they took a lot of

effort a lot of action to go there to

deliver ice and they made it available

and they were selling it and then they

got arrested and what will get into the

legal part of that in a little bit but

so now we have a good sense of what

we're what we're analyzing and we know

that this is draws a lot of negative

reactions from people but let's get into

this action in a little more detail

because to really assess it we need to

think about like what are some of the

components of what's going on here now

one thing to first note is people are in

distress after her

or after a earthquake after a disaster

or in that case even in the case of a

pharmaceutical if they have a disease

but did the price Gaucher's do anything

to put them in harm it's important to

reflect on this I think economists

really take a hard-nosed approach to

this and saying well actually it wasn't

the the gas station owner it wasn't the

person selling the ice that made the

price rise it was the disaster itself

disaster itself is what caused the

demand to increase usually demand for

ice is going to increase after natural

disaster powers out people don't have

access to refrigeration so it's going to

cause an international increase in

demand and on the supply side oftentimes

the natural disaster will disrupt

traditional supply lines and you won't

be able to ship the normal goods in

through the traditional means as quickly

so you may have a supply shock and a

demand shock and those natural

conditions are going to get a you're

just using basic supply and the demand

analysis are gonna cause the price to go

up for those Goods so it's important not

to blame the actual person raising the

price they're just conveying the message

that that the conditions of supply and

demand have changed and therefore this

good is more scarce more people want it

the price the market price has to go up

you know I think that's an important

thing to keep in mind here because it's

not like a case where if you could

imagine like a doctor poisoned their

patient so now they need the antidote so

you've poisoned them and now it's like

oh how much are you gonna pay are you

willing to pay for the antidote because

you've already taken an action to put

them in a situation where they need the

the antidote to the poison and that's

clearly not what's going on here right

mm-hmm and and I think it's really

important to reflect on how like gas

station owners actually charged for the

price of gas that they sell they'd base

it off of replacement cost so where

people say it's unfair as they see well

the price of gas is $2 today before the

storm then the day a storm it jumps up

to $8 well that definitely seems unfair

it's the same gas well the gas station

owner is saying okay what's the cost to

fill my my tanks with gas again so I can

provide it to two more customers

and if that cost goes up well to refill

there the gas station tanks they need to

let the price of each gallon they sell

go up in order so that they can replace

it in the aftermath of a disaster I

think also provides a good illustration

of a point we make in economics often

quite generally or dryly whether the how

knowledge in economics is very dependent

on space and time or plate you know

place contingent and if you could

explain what this means and you know how

it is that time and place matters for

for goods I think one of the easy would

be a bottle of water and I went to buy

it right now leaving the set I'm not

paid two dollars max and that would be

my convenience thing of just going into

a store but if I get lost in the desert

and I've been in the desert for a day or

a day and a half without any water and

someone comes up to me I would probably

be willing to pay way more than two

dollars actually I know I'd be willing

to pay way more than two dollars because

that that place and time that water is

like my life one and then I'm gonna

value it obviously a lot more and the

time and place mattered about how much

about you did right now I don't value it

that much but in a different time

different place the desert I value it a

lot more so that's the same thing in a

natural disaster I know before it you're

you don't know what harms let me cause

to you so every day you know things that

you use like food eyes your refrigerator

you probably don't even think about them

mmm but once you lose it you start to

value them a lot more

so that time and place has changed your

situation has changed and then so your

evaluation is going to change based off

that in it's important to point out that

you know when the power was out in

Raleigh North Carolina after the

disaster you know that their power might

be out for two or three days when people

got the ice is very important getting

the ice in another week when the price

might be back to two dollars isn't

really what you need you need the ice

where you are

and you need it and that that's

everything a big part of what creates

value in economics right it's it's not

just what the good is but when and where

you have it and do you have it when you

need it and in the form eugenia right

yeah and I would add in that burn from

outsider's perspective it's really hard

to assess what that time in place is

without that price signal because

Outsiders and you can see this through

through in-kind donations we see this

with with natural disasters all the time

is that people donate goods that

actually people in the disaster area

don't really need so to know

specifically what those people in that

disaster circumstance need at that time

you really need the price signals to go

up and down to say okay we really

desperately need this and companies like

Walmart have gotten really efficient at

that combing through sales data finding

that of all things people prefer

strawberry pop-tarts after a natural

disaster so they you know they stock up

water and they stock up strawberry

pop-tarts and and other items that they

know customers were going to want

following a natural disaster so you you

can't we out the people not economists

should be very careful about discounting

the importance of that information

conveyed through the price system in I

think it's just an important role that

the prices are providing there because I

mean I don't let's go back to the

example of the the young college

students from the enterprising college

students from North Carolina now maybe I

don't know if $12 was actually going to

cover all of their cost or maybe allowed

them to make some profit and I mean I

just for one since we could say they

might be entitled to earn some profit

because they came up with this clever

idea to go ahead and do something but

even if it does involve some profit

would we would people have been better

off if they had sold it for good is if

they've been selling their ice at a

price that wouldn't allow them to make

any profit I mean this is this is that

high price even if it's above the cost

level of cost still play an important

role I think it's good to always step

back and ask yourself is it good to take

away someone's best option even if it's

an option that you do not agree with and

that can be very hard depending on your

own personal beliefs and morals which

will change depending on the person

that's very subjective and it can be

easy for us to say no that shouldn't be

allowed because it's not the best option

to us and so we're not fully considering

it and I think that you know the price

might seem a little unfair but in the

long run where was it twelve dollars or

ten dollars however much they charge for

the bag of ice at the end of the day

there was people who really needed that

they responded to knowing that they were

out of ice so they were taking the role

stepping up trying to give a service and

yes like I might say it's unfair but

people that needed ice got the ice and

at the end of the day what was provided

what was needed was provided and so I

think the end of the day they got what

they needed and two dollars in the

scheme of things isn't enough to arrest

someone like or keep people from having

it because you subjectively didn't agree

with what it being sold for anything is

similar you might need a very high price

like that to make people stop and

realize hey that ice is really expensive

and it really is the markets way of

trying to say you better have a really

good reason for using this ice right I

know that in the same article they

mentioned hotel rooms mm-hmm in a

natural disaster especially hurricanes

and if you live in an area where you

know you can be in flood danger a lot of

people move out and so hotel rooms

around the area skyrocket sometimes and

people think that's bad thing like can

you imagine making these people not be

able to afford a safe place to stay but

in reality I know that some family

support for example could afford more

than one room at a normal cost so they

might get

for the ideal of comfort hmm when it's

very practical for for people to stay in

a hotel room and there's two beds in

there but when the price goes up even

the wealthiest person is going to step

back and think is that necessary like do

I need to pay that extra money for

comfort or in this situation do I just

get one room do we all stay in there and

then that opens up a room for someone

else and so the higher prices also makes

people I think realize how much money

they're spending per se they don't

overspend and over buy they buy more

what they need because the price is

higher so they're having to recognize it

more and so then it leaves more for

other people which is basically

allocating goods people is Marcus way of

saying this isn't a day for to be

comfortable this is a day to get

everybody out of harm's way and make

sure that everybody needs to get out of

harm's way as a hotel room there's

another element of the assessment where

we go to assess through the activity of

price couches after a disaster to take

into account and that is the fact that

those gentlemen in North Carolina could

have just stayed at home and continued

to watch its telethon a hurricane

coverage on their television he's there

had been affected by the hurricane they

probably still had power they could have

watched what was happening on TV would

it be wrong for somebody to sit back in

their the comfort of their home and

watch TV yes so I actually use examples

like this in class when I discuss price

gouging and what I usually do is I find

some recent example of price gouging

going on preferably in the southeast

region so it sits nearby that students

could theoretically get in a car and

take deliver eyes to that area and I

asked at a price of one dollar bag how

many of you would rent a truck and take

a few days off of from college or work

drive this truck over and deliver eyes

this area that needed it

no hands are raised and I keep raising

the price to say at $2 $3 $4 and once I

started getting up to ten fifteen dollar

range then people are served well per

bag that that'd make it worth it for me

to take that trip

but in what's ironic is those people

that do that are the ones doing the most

to help out these disaster victims

they're the ones being entrepreneurial

taking the risk it's not guaranteed I

mean I certainly wouldn't know anything

about renting a refrigerated car and

trucky nice a couple states over and

taking chainsaws you wouldn't even know

if you're able to get in so there's

definitely an element of risk in there

so we're targeting feathering the people

doing the most to help these people when

most of when we certainly never tar and

feather the person that just sits at

home and says you know what I'm not

going to do anything in fact a lot of

people probably have some spare ice and

their their fridge during natural

disasters and and very few of us get off

the couch and and deliver to that area

well that seems worse offering ice at no

price seems even worse than offering ice

at twelve fifteen dollars a bag so it

seems very odd from a philosophical

sense that that most of our criticism is

against the people that are doing more

than anything than the rest of us so I

think we've offered a good number of

good considerations things to think

about here but still many people think

that there's something wrong with this

charging an excessive price after a

disaster and so as a result we see laws

get passed about 34 states I believe

have a law restricting some form of

price gouging

now does Alabama have such a law and if

so it would seem like there's been some

ambiguity and how we've been trying to

exactly discuss price gouging here how

would you go about defining price

gouging for for a law for instance I

know that in Alabama you can raise the

price it's price gouging if it's raised

more than 25 percent

unless there's are reasonable calls to

justify higher than 25 percent but the

problem with that is reasonable is very

projective what's reasonable to me might

not be reasonable to you might not be

reasonable to dr. Smith so how do you

define

in that line like if I'm a business

owner and I'm presented with this law

and I think okay well this will be 30%

is fair and then I'm in trouble with the

law

but I could say hey well that was

reasonable in my eyes like how do you

make that it distinct and I think that's

a huge issue because when you're talking

about laws like this you can't really

leave it so subjective that's reasonable

like calls for more than that like you

have to go in more detail because then

there's really we all could think of

something different and then I might be

punished but y'all might not but I could

truly believe that I was being

reasonable in the situation hmm so that

causes people to not want to act at all

because they're not gonna want to put

themselves in the case of getting

arrested like the people so it's better

for them just not doing anything and

then people will become worse off

because of it and to me that's the more

tragic outcome then you really just

think of that very much in terms of the

general incentive for entrepreneurship

for development ever really whether we

talk about whether investing in a

developing country where property rights

are less secure or you've got corruption

and or whether you're acting in the

aftermath of a disaster uncertainty is

not a good for economic activity is that

definitely not mm-hmm yeah and I wanted

to kind of stress on the supply side

also if you put in a price gouging law

that says the price cannot rise like

25-30 percent above its normal everyday

price well that prevents the the usage

of like paying workers overtime to like

like let's say Hurricane Katrina knocks

out some offshore oil refineries and you

know hurts the oil supply there's

increased demand for oil well how does

the gas station get more oil well you

got to pay truckers overtime to ship the

oil and you have to pay oil rig workers

to work harder you got to pay the people

at the oil refineries to take out more

production well

you can't afford to do that if your

price is and a lot of do it so to rise

high I know so it precludes the usage of

you know emergency measures

to drastically increase the supply to

meet the the needs of the people in that

disaster area would there be an

alternative to passing laws to try to

keep of the prices from from going up

too much after a disaster

absolutely it's competition and going

back to the Raleigh incident yeah they

would not have been arrested then more

people would have caught on him and like

hey that's a good idea you know they're

offering eyes they might be making a

slight profit well we can go and I can

sell it for eleven dollars and still

cover my cost and make an even smaller

profit and then people are going to pay

11 versus 12 and then after that some of

them say well what about $10 then

they'll really buy mine and so when you

do this project they're getting driven

back down because that's the beauty of

competition the cheapest price for the

same good in the same convenience is

what's going to be paid for but if

there's no competition you literally can

pay or charge them as anything and

especially a case like natural disasters

when people need the good so competition

is actually the perfect solution because

then it's just the markets way of

getting it down to a lower price that's

better for everyone and then everyone's

getting more of the good as well mm-hmm

in high prices when that natural

disaster causes that price to increase

that's going to be the number-one

signals say we need more competition we

need more entrepreneurs working to solve

this and that's going to allow the

market mechanisms to work to drive that

price back down in that also ends up

driving businesses to think about

recognizing the next time in a disaster

is looming hurricanes approaching to

realize if they remember what happened

to prices after the case in the last

disaster recognized hey if we are excess

or ice available after this hurricane

that we could actually sell it for a

nice profit and the prices help further

to help prepare our for the neck

disaster make sure that Walmart takes

steps to figure out what it is that

people need they'd like to eat after a

hurricane and make sure they've shipped

at it I mean absolutely no we mentioned

the briefly earlier one other example

where price gouging sometimes is brought

up and that's with regard to

pharmaceuticals there is a case of a

couple of years ago of a drug called

daraprim and that came to a lot of

national attention to the people thought

of as a case of price gouging as well so

you could refresh our memories what was

going on with this case of daraprim well

I regionally the peel cost about a

little under $14 per pill mm-hmm and

then it's skyrocketed to 750 dollars per

pill which was a $5,000 price increase

which is huge and that's normally a lot

bigger price increase than we see

normally when we're talking about price

gouging and those topics but that lead

because there's no competition right now

to the drug and it's not like I wear the

most of us can live without it this is a

drug that literally holds people's lives

in its hands pretty much and so honestly

the price probably could have been

raised it's very valuable and I'm not

saying that huge price increase is

something that I agree with is are adult

but they saw the room where the price

could increase because people needed it

their lives depended on it they also

realized that there was no competition

so that person either had to choose

between possibly dying from not taking

it or buying from them because there was

no other option and they took it mmm and

so that was a lot of that yeah and I

think important for this case is that

the competition was artificially

restricted by the FDA approval process

they prove a drug and in this case they

didn't allow generic competition so this

drug maker literally had a monopoly on

this particular drug and the government

was was enforcing that monopoly so it

kind of highlights the importance of

allowing a free market allowing

competition if you restrict that

competition then supply people supplying

goods that have a nonetheless demand

can exploit customers though I would add

in where we're this is right after a

united crisis United Airlines recently

kicked a passenger off a flight and they

were drugged off the flight and someone

took a video of it and customers are

very irate and their stock prices has

plummeted I think it went down about 4%

already which represents millions of

dollars in shareholder value even a

company like this could lose shareholder

value if customers get irate enough and

send it around in social media and say

we're gonna use social pressure to fight

against this this company so I think

companies do keep this in mind when

they're making plans yeah I think that

the daraprim example certainly does just

reinforce that whole point of

competition it was a lack of competition

there in that case well well thanks very

much for coming on a talk about this

complicated and controversial topic and

helping explain to us a little bit more

what all economists think about this

topic and thanks for joining us join us

again next time for another

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