Embracing Price Gouging

A friend from the UK was telling me, with some anger I might add, that people were ‘getting gouged’ on trains coming back to London through the Chunnel.  That is, with all of the volcano ash grounding air traffic in northern Europe, the train back is the only standard way back to cross the English Channel into the U.K.; and the operators of the train line have raised prices dramatically.  My friend implied that it was immoral to take advantage of the crisis.

My question to him was:  ‘are the trains going into the U.K. empty?’

And of course the answer was:  ‘no’, the trains are quite full. 

This of course doesn’t justify charging higher prices, but it points out that people were willing to pay a lot more than usual.  And it begs the next question: 

If the supply is low and demand is high, by what other means would you distribute the limited supply? 

. . . by, say, lottery . . . by those with political connections . . . by height?

The law of supply and demand tends to deliver the optimal quantity to the most people by using price signals, rather than some other means.  For those whom it’s most important, they will sacrifice more of their limited resources for this outcome.  While others, for whom it’s too great a sacrifice, will choose to wait.  Yes, there will be people for whom there is no choice—as the clearing price is just too high, but that’s always going to be the case in any method of distribution (holding a losing lottery ticket, for example). 

The problem with switching to an arbitrary method is that people tend to engage in counterproductive activities to game that method—creating more waste than the price method . . . often much more.  In short, they begin to bargain with a different currency.  They will trade political favors.  Or, they’ll apply for the lottery, only looking to sell the ticket for profit if they happen to win–i.e. the gouging happens anyway.  This happens all the time, whether it be black markets or, say, stubhub.com which gets extra tickets to people who really want them–at the lower market clearing price when demand is low, or the higher one when the demand is higher . . . given that stadiums fix their price at the beginning of the season—without consideration for whom the team is playing, or how the team is performing during the season.

Given this, price gouging, for all of its unseemly nature is just an extension of this behavior . . . delivering limited resources to those who value them most . . . and doing so in the most efficient way we currently know of.  Any other way is prone to more corruption and waste–the very things we detest in a political economy.  Why would we endorse it, by default, here?

Setting aside the emotional reaction (which I too feel . . . even in my cold, black, capitalist heart–I think I’m kidding), can we accept that someone is always going to be left out . . . that it’s never going to be ‘fair’, whatever that means? 

So, what’s the real problem with doing the efficient thing?

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