In defense of price gouging

I’m reading a lot of criticism of price gouging in Houston right now and wish to take a moment to explain the other side of the issue.

My small business chooses to stock emergency supplies in the event of a situation like this in our small rural community, including up to 2,000 gallons of gasoline, backup generators, various types of pumps, emergency portable water tanks, bottled water, a standby construction work crew, etc. and other rare and expensive tools and other items that the public never needs to pay attention to except in an emergency. Redundant essential equipment is maintained at two different locations for extra resiliency.

Extra physical capacity and extra inventory comes at higher cost that are paid every month regardless of whether used. State license and inspection fees and insurance costs, for example, are based on capacity not usage. Gasoline and tanks are not a stable product so extra inventory must be rotated and sometimes treated or disposed (at significant cost earlier this year). Pumps and generators require constant maintenance and replacement costs. We start them up every month or two just to make sure they are ready when needed. Invariably, some do not start and need repair.

Water system testing costs hundreds of dollars for every bacteria safety test. This is all an extra voluntary expense for disaster preparedness, not a required operating cost for me. Perhaps the biggest cost for me is recruiting and maintaining relationships with laborers and suppliers to be available in an emergency when needed takes a lot of my personal effort that of course is not a paid effort unless they are needed.

The cost of just maintaining all of this runs into thousands of dollars per year. How are we supposed to price these services in an emergency? What about the cost of maintaining all of this over the many months and years when it is not needed? My conclusion is that the best fair way to allocate resources in a disaster is based on market forces: good old ‘supply and demand’ provides a resource allocation system for us. I can say that $8 per gallon gasoline is not outside the realm of reasonable pricing under such conditions considering all of the costs that go into having it available and deliverable in an emergency situation.

So, bottom line, if we ever have an emergency situation like Houston is experiencing then I hope that we will be properly prepared to be able to sell you gasoline and provide other emergency services, but it will cost a lot!



One response to “In defense of price gouging”

  1. Most states have laws against price gouging but my understanding is that they are not effective and the legal counsel I’ve received or overheard on this topic indicates that it is not difficult to develop legal defenses to overcome price gouging laws. Some people offered an opinion that price gouging is immoral. That’s a more interesting issue to me. If we presume that price gouging is immoral then the next logical question is what alternate method to use to deny resources in a state of scarcity.
    First come first served? Those judged most in need? Nepotism? Personally, I would not feel ethically justified using any method other than economic supply and demand. But I’m open to suggestions.

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