One issue that caused a minor controversy after the terrorist attacks on September 11 was so-called price gouging. On his popular TV show, The O’Reilly Factor, Bill O’Reilly made a big deal of it with Jennifer Granholm, attorney general of Michigan, and Dan Mogin, a consumer lawyer from California.
O’Reilly accused the Sheraton Hotel at Kennedy International Airport, a Holiday Inn in New York City, and Alamo Rent A Car in Charleston, South Carolina, of taking advantage of the terrorist attacks by raising prices. Granholm mentioned that there were 13 gas stations in Michigan that overcharged consumers; she called them un-American. Mogin said it violated New York’s consumer-protection laws for a business to charge an “unconscionably excessive price.” Who determines what is “unconscionably excessive”? The legislators in New York state obviously believe they do.
Apparently, there were some gas stations that charged $5 a gallon soon after the attacks. The news media reported that many consumers were angry. Those gas stations would have loved to charge not $5 but $50! Why didn’t they? Because prices are a function of supply and demand.
If prices are really too high, suppliers have no choice but to lower them. (In fact, gas prices fell dramatically soon after September 11.) However, if prices go up and stay there, enough consumers must be willing to pay the higher prices. Some will object to this argument, saying consumers have no choice. But people don’t trade with each other unless each expects to benefit. Even though I would enjoy paying nothing to attend a San Jose Sharks game, my paying $100 for a seat proves that the benefit to me of spending the money outweighs the cost-anything else I could have done with that $100.
Why Pay More?
Remember that if a business wants to raise its prices higher than its competitors’ prices, it might hurt itself. Why would a consumer pay a higher price if he had alternatives? In a free market consumers are sovereign. O’Reilly proudly said, “I would never go to these places!” That’s the point: we choose where to spend our money.
When people become outraged at higher prices, they act as though they have a right to a hotel room, a rental car, or a tank of gasoline on their own terms. They fail to understand that prices reflect supply and demand and that sometimes these conditions change.
As Henry Hazlitt noticed, when people protest a new higher price, they imply that the old price was okay. He said in Economics in One Lesson, “That starting or previous price is regarded as ‘reasonable,’ and any price above that as ‘unreasonable,’ regardless of changes in the conditions of production or demand since that starting price was first established.” Yet people protested when the price first went up to the original level. This logic regresses until the good or service is free!
After a tragedy, such as the destruction of the World Trade Center, demand for certain goods and services goes up and suppliers might also anticipate restricted production of certain goods. Thus higher prices are not only justified in the sense that they are called forth by new conditions, but they also help to ration goods and services, encouraging people to conserve and to satisfy only their more urgent needs until conditions loosen up again.
When I tried to buy an American flag at a nearby store a few days after the attack, it was out of stock. I didn’t hear that stores were “price gouging” on flags or other patriotic products, but what if they had raised their prices? I might have been able to buy a flag that same day instead of waiting. Scarce goods have to be rationed by some mechanism, whether by price or by time. Nothing of value is free. Economists agree that prices are the most efficient way to allocate goods.
Millions of people in the United States and around the world believe that corporations and capitalists are the enemy. They believe that businesses take advantage of consumers. This belief ignores that through our buying and abstaining from buying we consumers dictate what will be produced. (It is also worth mentioning that some of America’s largest corporations, like Cisco and General Electric, donated millions of dollars to the relief effort in New York.)
A few of my friends and colleagues think I am cold and callous when I mention that it is not wrong for businesses to raise their prices after a disaster. What is really wrong is for the government to hurt suppliers and, ironically, consumers in the name of consumer protection.
NINOS P. MALEK
San Jose State University,
De Anza College, and Valley
Christian High School