Amusing Hypocrisy...

The image says it all.

Update: Ok, I should qualify this. My point here was more or less to mock those who either have no knowledge, or worse, willful disbelief in economics and yet still pontificate on economic issues. I will admit that there is such thing as price gouging, but that it is much more nuanced than just prices becoming 'unfairly' high.

Price gouging DOES occur when...

1) There is an emergency situation and demand for a particular good (such as water or electricity) skyrockets, and

2) In place of a competitive market there is only one or a few firms that can exert substantial market power.

3) Those firms, in their effort to maximize profits (as only makes sense), a) jack up prices in response to the high demand, but still artificially hold down production because of their market power, and/or b) collude in order to hold prices artificially high.

When (1) - (3) occur, price gouging is taking place and it is highly disadvantageous to those in need (ie those with high demand). However... if firms are relatively competitive and the market price happens to go up, even by a large amount, during an emergency, then that is potentially *good*! How can that be?

In competitive markets, the price equates marginal benefit and marginal cost. If demand goes up, the only way to avoid a price increase under normal circumstances would therefore be to tolerate a shortage (a potentially large shortage at that). This is because we cannot expect firms to operate at a loss, so they would just stop production before they run into loss territory. Therefore, while some people would get the much-needed good, there would be less of it out there in total and people perfectly willing to pay for the good would be left empty-handed.

Check out the diagram below:

Ignoring all the various solid and dashed lines, just take note of a few simple facts. First of all, in either state of the world (low demand vs. high demand), the monopoly price is noticeably higher than the market price, and the monopoly output is noticeably lower. Secondly, note that when demand increases, the market price increases somewhat but market output increases much more. The opposite is true for the monopoly case.

For all the do-gooders out there, I will also point out that if we were to prevent "unfair price gouging" by imposing a rule that prices not go up in an emergency, then the level of output in the emergency would be the same as before the emergency. In other words, we would be left with a huge shortage in the amount of (high market output - initial market output). If you think that causing shortages of needed goods is the way to go, then by all means, do try, but most people won't be calling you a do-gooder when they see can't buy what they need in an emergency.