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Price Gouging: Why it Provides a Benefit to You


In light of Florida being hit by its first Hurricane in 11 years and football season starting, I thought I would talk about a topic that always comes up at this time of year.  Price gouging is defined by legaldictionary.net as: The practice of raising prices on certain types of goods and services to an unfair level, especially during a state of emergency.

Many people believe that this should be illegal, and politicians love to grandstand about it and make laws that make it illegal.  I disagree with them, and before you get upset with me, hear me out as to why.

First of all, from a very general economic standpoint, price gouging is actually just a move up the demand curve.  If you have taken economics 101, you know that as demand rises for an item that has limited supply, the cost increases.  Take the example of a hotel room in Gainesville or Tallahassee on weekend where there is a home game.  There is a fixed number of hotel rooms available in those cities, and normally they have a predictable vacancy rate.  The hotel prices those rooms to minimize that vacancy rate and maximize profit when a normal level of demand exists.  Let’s say that the "normal" price is $100 per night.  However, on a game weekend, there may be an additional 50,000 people coming to town, and they all have a decision to make.  That decision comes down to three choices; book a room for the night in the city, book a room outside of the city, or drive home. 

The cheapest option is usually to drive home that night, but is also the most inconvenient if the game ends late.  You have to fight traffic, stay awake on the way home, and then usually find yourself very tired the next day.  The option of getting a room outside of the city is slightly cheaper, as a rural hotel room won’t have the demand that a room inside the city does, and will therefore be cheaper.  You still have to fight traffic and drive for a while, though.  The most expensive option is to stay in the city.   This is where the hotels constantly get accused of price gouging.  Most hotels will raise prices over that weekend, and some will insist on you booking the hotel Friday and Saturday night, even if you are just using it on Saturday.  However, you don’t have to worry about fighting traffic out of the city, driving at night while you are tired, and you can get a good nights sleep and drive home the next morning well rested. 

So what would happen if the hotels didn’t raise their prices on game weekend?  Almost everyone travelling to the game would choose to stay in town, and every hotel would book solid as soon as the room became available.  This would make the people who were actually able to book the room happy, but there would not be any rooms available to the rest of us who wanted to stay.  In addition, the hotels would lose out on a ton of potential profit, and ultimately the number of available rooms would go down due to hotels closing.  This seems like a pretty bad system, doesn’t it?  If only there was a way to allow people who really wanted the rooms to get them.  Well, that is exactly why the hotels price like they do.  If I want to stay in Tallahassee on a game night, I can.  All I have to do is be willing to part with a bunch more money than it would cost me normally.  But the room is available, and that leaves the decision to me instead of me not having a decision.  Would you rather have the option of paying more for a room, or not have that option?

This same analogy is applicable when a hurricane is approaching our coastline.  This is typically when “price gouging” rules are put into effect.  Let’s use the example of generators.  Right before a hurricane, generators typically fly off the shelf.  People never want to buy one and store it, they simply go buy it right before they need it.  By the day before a hurricane, you can’t find a generator within 100 miles of the path of the hurricane.  Why is that?  Price gouging laws prevent it from happening. 

The cost of bringing in a bunch of extra generators the day before a storm is much higher than bringing in a few generators on the regular weekly shipments.  First, you have to locate the generators and collect them in a distribution center.  Then you have to arrange for a truck to deadhead them, which is more expensive than running a truck in its regular route.  Plus there is the extra labor involved with this shipment.  All in all, these generators, by the time they hit the store, may have cost more to get that location than they would normally sell for.  What normally happens in that scenario?  The store raises the price, and then the consumer can make the decision if they want to purchase the generator.  However, because even a small increase in price can be considered “price gouging” under the law, the store is not going to go through all that trouble just to lose money and possibly be investigated by law enforcement to get you a generator.  Therefore, no one gets a generator, and everyone complains that they don’t have one. 

So it doesn’t matter if you have a small baby at home, you are an elderly person with special needs, or a you have a medical condition that requires electricity to run a piece of equipment.  The price gouging laws are going to keep all of you from getting a generator when you need it most.