microeconomic

in the neWS

Frfr* fncreases aft"er Fxasfers Far several days in 2010, many towns around Baston found themselves without drinkable tap water. This increased the demand for battled water, putting upward pressure on the price. While some policymakers cried foul, this opinion piece endorses the market's natural response.

lVhat's Wrong with Price Gouging? Bv Jrrr Jncoev

Jhere wasn't much [Attorney General] I iVantra Coakley could do about the massive

pipe break that left dozens of Greater Boston

towns withoul clean cirinking water over the

weekend. 5o she kept herself busy instead

lecturing vendors not to increase the price of

the bottled water that tens o{ thousands of

consumers were suddenly in a frenaT to buy. "We have begun hearing anecdotal

reports of the possible price gouging of

Rising prices help keep limited quantities

irom vanishing today, while increasing the

rdds of fresh supplies arriving tomorrow.

It is easy to demonize vendors who charge what the market will bear follow- lrg a catastrophe. "After storm come the

;ultures" IJSA Today memorably head-

,rned a story about the price hikes that fol-

'o'.r,,ed Hurricane Charley in Florida in 2004'

ioakley hasn't called anybody a vulture, at

liast not yet, but her o{fice has dedicated

a ielephone hotline and is encouraging the

iiiblic io drop a dime on "price gougers'"

Before you drop that dime, though. con-

s;cier who really serves the public interest-

:re merchant who boosts his price during a

:'isis, or the merchant who re{uses to?

A thought experiment: A massive pipe ,:.iptures, tap water grows undrinkable, and

:onsumers rush to buy bottled water from

the only two vendors who sell it. Vendor

A. not wanting to annoy the governor and attorney general, leaves the price cf

hrs water unchanged at 69 cents a bottle.

Vendor B, who is more interested in doing

business than truckling t0 politicians, more

than quadruples his price to 52.99.

Source: ]rhe Boston Globe, Hiay 4, 2010,

store-b0ught water," Coakley announced 5unday. "Businesses and individuals can- not and should not take advantage of this public emergency to unfairly charge consumers . . . for water." lnspectors were being dispatched, "spot-checks" were being

conducted, and "if we discover that businesses

are engaging in price gouging," she warned, "we will take appropriate legal action."

Governor Deval Patrick got into the act, 100. He ordered the state! Division of Standards to "closely monitor boltled water prices" in the area affected by the water emergency. "There is never an excuse for taking advantage of consumers," he intoned, "especialiy not during times like this."

You don't need an economics textbook

to know what happens next.

Customers descend on Vendor A in droves, loading up on his 69-cent water.

Within hours his entire stock has been

cleaned out, and subsequent cust0mers are

turned auray empty-handed. At Vendor B's,

on the other hand, sales of water are slower

and there is a lot of grumbling about the

high price. But even late-arriving customers

are able to buy the water they need-and

almost no one buys more lhan he truly

needs.

It never fails. No sooner does some calamity trigger an urgent need for basic resources than self-righteous voices are raised to denounce the amazingly efficient system that stimulates suppliers to speed those resources to the people who need them. That system is the free market's price mechanism*the fluctuation of prices because of changes in supply and demand.

When the demand for bottled water goes

through the roof-which is another way of saying that bottied water has become kela- iively) scarce-the price of water quickly rises in response. That price spike may be annoying,

but it's not nearly as annoying as being unable to find water for saie at any price.

When demand intensiiies, prices rise. And

as prices rise, suppiiers work harder to meet

demand. The same G/obe story ihat reported

yesterday on Coakley! "price-gouging" state-

ment reponed as well on the lengths t0 which

bottlers and retailers were going to gei more

water into customers' hands.

"suppliers worked overtime, pumping

up production at regionai bottling facili-

ties and coordinating deliveries," reporter

Erin Ailworth noted. Polar Beverages in

Worcester, for example, "had emptied out

its plant in the city last night and irucked

in loads of water from its New York facility."

Letting prices rise {reely isn't the only

possible response to a sudden shortage. Government rationing is an option, and so are price controis-assuming you don't

object t0 the inevitable conuption, long lines, and black market. Better by far to let

prices rise and fall freely. That isn't "goug-

ing," but plain good sense-and the best

method yet devised for allocating goods and

services among free men and women.

A scarce resource.