Supply and Demand

Following the recent hurricanes there has been discussion on the radio about “price gouging”. In an unfettered free market, there is no such things, as the market is by definition driven by “supply and demand”. Ergo the term “free”, allowing market forces to dictate price (demand) based on availability (supply). One question raised on the talk shows was whether a gas station in an area about to be devastated with long lines of cars evacuating and where there is a severe shortage of gasoline, should charge more than 10 times the pre-catastrophe price. Most callers into the shows said it was somehow wrong and profiteering. One caller with a small tree service business in New Jersey said that following the devastating storm which hit the Charleston area a few years ago, he drove his truck down there and was selling his service for up to twice the normal price. He felt he was not doing anything wrong and many callers agreed. In both cases “supply and demand” was at play. The gas station owner sold the limited supply in his hands for as much as he could get. Though he did not create a monopoly, his business indeed was a monopoly, given that there was no supply of gas elsewhere in that market. The tree guy saw a strong demand for his service and traveled to provide it. However, the tree guy as did many others saw a demand for his service and traveled to where the demand was. Certainly he incurred additional expenses in travel costs, hotels, time lost during travel just to mention a few. There is also the non-monetary cost of being away from friends and family. This, if he just wanted to maintain his profit margin, would have required a much higher price to make the trip worthwhile in an economic sense. (I know, I know, economists would tell me cost doesn’t enter into the equation when it comes to a free market except to indicate a lowest price possible.) In both cases there was a benefit to people in the devastated areas. In the case of providers traveling to the areas there may even be a level of altruism prompting the action. In the case of the gas station owner there was nothing but greed driving the action. One might argue that one was a noble act whereas not the other.