increasing marginal utility water drought

In West Virginia, Is Price Gouging a Problem or a Solution?

by Elaine Schwartz    •    Jan 14, 2014    •    1108 Views

West Virginia’s Attorney General says it’s illegal and “just plain wrong” to inflate the price of water in times of emergency. In addition, he suggests that people keep an eye on what vendors charge for items like hand sanitizer and paper plates.

I wonder…

The Attorney General was responding to the devastatingly toxic water contamination that struck Charleston, West Virginia and nearby communities. Told not to drink, bathe or touch the water, more than 300,000 residents and countless businesses were affected.

This takes me to a Hurricane Sandy story. Hearing that his mom had waited 3 hours on a gas line, a man named Steve who was driving home to the NY/NJ area from Vermont picked up several 55 gallon barrels and filled them with gasoline. He offered the gas for sale on Craigslist, negotiated each transaction individually, and wound up averaging $11.00 a gallon.

A politician would call Steve a price gouger. An economist would say, he was solving a shortage problem.

West Virginia’s “price gouging” law prohibits price hikes over 10% for goods and services that relate to the emergency. That appears to mean that a $3.00 container of bottled water cannot cost more than $3.30. But what if, with considerable time and energy and expense, a store owner could bring in trucks of bottled water and make money by charging $4.40 a container? Price increases during an emergency encourage the supply side to provide more and the demand side to conserve as much as possible.

Here are 2 “images” of the possible results of price gouging laws:

Supermarket Shelves Water West Virginia

Price Ceiling:

Shortages Result from Price Ceilings

Let’s conclude by asking when the politicians are right about not raising prices during an emergency and when an economist has the right answer. Your opinion?

Sources and Resources: For almost firsthand information on the Charleston water crisis, I looked at local newspapers. On the price gouging debate, had my Steve example while econtalk made one of my morning walks fascinating with this discussion of a just price.

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