Peter and I usually see things from a similar viewpoint, and I generally respect and listen to his opinions. Not this time. He is saying that:
Businesses aren’t pricing their goods according to what they pay for them, plus a fair and reasonable profit. Instead, they’re pricing them as high as they think they can get for the product.
Then goes on to call this “price gouging. This is where I disagree with Peter.
Pricing things according to what people will pay is what everyone does. Let me explain. Let’s say that paying your bills costs you $40,000 per year. Adding on 10% for retirement savings, and 10% for discretionary spending would make your total $48,000 per year.
Now let’s say that your employer offers to pay you $60,000 per year. Do you say, “No thanks, boss. I only need $48,000, so me taking more would be unfair and unreasonable.”
Of course you don’t. So why would you expect a business to act any differently?
Prices are set by supply and demand. If customers are willing to pay $7 for an apple, then businesses will sell apples for $7. That’s what Whole Foods is selling apples for in Peter’s example.
Now let’s say that another business, call them Winn Dixie, is selling apples for $1. Now consumers have a choice: they can go get the $1 apples at Winn Dixie, or they can go get them from Whole Foods.
So why don’t consumers go to Winn Dixie, rather than Whole Foods? There are a number of reasons, which can include what the consumer perceives as the quality of the apples at Whole Foods, or perhaps the shopping experience (maybe one store is cleaner), or other issues like organic foods, the store supports causes or social issues that the consumer also supports, or any number of reasons not directly related to the costs of the apple itself. In other words, Whole Foods isn’t just selling apples. They are selling a shopping experience that some consumers are willing to pay more for.
That’s a choice we each get to make every time we purchase something. That isn’t gouging, it’s the market at work. Even when something IS considered price gouging, I maintain that it isn’t unfair. Let’s say that a hurricane hits my area. The law says that charging more than normal for products like gasoline is price gouging, and that is illegal.
Let’s say that before the hurricane, I was selling fuel for $4 a gallon, but buying it for $3 a gallon. So what happens when the hurricane hits, and everyone wants fuel? I could continue to sell fuel until I run out, then wait for more fuel to come in from my regular supplier, in which case no one gets fuel from that point forward.
Or, I can pay someone to haul more fuel in, even though it takes longer, and I may have to outbid someone else to get that supply from a different supplier. So now I can buy fuel at a higher price, pay more to have it hauled in on a chartered truck, and my cost to have the fuel delivered is now $7 per gallon. The only problem is that the law says that it is price gouging for me to sell that fuel for more than the $4 I was charging before the storm. So I stay home and don’t sell any fuel. Now there is none available at any price.
How did that help anyone, except the 10 guys who came to my establishment before the storm and bought up all of my fuel in anticipation of a shortage?
So how does the market respond? The black market comes in and makes a new, underground market. Now those ten guys are selling fuel for $20 a gallon because they are the only ones with any gasoline to be had.
This is why price controls cannot, and will not ever, work. It’s called the LAW of supply and demand for a reason.