A Look at the Irrational Fear of 'Gouging' and 'Dumping'

Gouging: [Colloq.] to cheat out of money, etc.; also, to overcharge. (Webster’s New World College Dictionary, Third Edition)

Just before Hurricane Katrina arrived, Alabama Gov. Bob Riley [R] announced his intention to prosecute "gougers." "Those who engage in price gouging will be punished to the fullest extent of the law," said Gov. Riley.

How does Alabama define "gouging"?

Alabama Attorney General Troy King says price gouging occurs when the seller prices an item or service at 25 percent or more above the average price which was charged in the same area 30 days before the governor declares a state of emergency. The law allows exceptions for price increases attributable to "a reasonable cost."

Hm-mm, does this apply to, say, housing prices?

For example, the city of Baton Rouge, almost 80 miles from New Orleans, saw its population double as a result of the people displaced by the hurricane and flood. Practically overnight, housing prices in Baton Rouge increased some 20 percent. Yet one reporter explained, "In a phenomenon familiar to Southern California’s housing market, prices are rising not so much because sellers are gouging, but because buyers are bidding up the prices." "Not so much"? Apparently, the reporter’s keen, psychic instincts recognized that the home seller perhaps only "gouged" to a small degree, because "buyers are bidding up the prices." But doesn’t this describe exactly what happens when — in the case of a natural disaster — the price of gas climbs rapidly?

In economists Milton and Rose Friedman’s classic book "Free to Choose," they explain supply and demand. " . . . [I]f an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it. Most economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another. . . . Prices . . . transmit information. . . . Suppose that a forest fire or strike reduces the availability of wood. The price of wood will go up. That will tell the manufacturer of pencils that it will pay him to use less wood, and it will not pay him to produce as many pencils as before unless he can sell them for a higher price. The smaller production of pencils will enable the retailer to charge a higher price, and the higher price will inform the final user that it will pay him to wear his pencil down to a shorter stub before he discards it, or shift to a mechanical pencil. . . . Anything that prevents prices from expressing freely the conditions of demand or supply interferes with the transmission of accurate information."

A convenience store owner who suddenly triples the price for batteries may suffer when the crisis ends. The seller could face the wrath of consumers who felt exploited or "gouged." But that does not change the seller’s right to charge whatever he or she feels the market can bear. In addition, the disaster-driven higher price creates opportunities for people outside the area to rush in supplies. Capping profit, in a time of sudden and severe shortage, creates a disincentive on the part of others to come in with supplies.

Now what about "dumping"?

Dump: to sell (a commodity) in a large quantity at a low price, esp. in a foreign market at a price below that of the domestic market. (Webster’s New World College Dictionary, Third Edition)

American lumber producers, for example, citing government subsidies for the Canadian lumber industry, accused the Canadians of "dumping" their lumber on the U.S. market at up to 75 percent below cost. Yet General Motors, according to Jeff Bennett of Bloomberg News, sold each of its vehicles, for the first six months of this year, at an average $1,200 loss. This compares to Toyota’s $1,488 profit per car. If, by definition, "dumping" means selling the product below cost, then why can’t Toyota and other competitors accuse GM of unfair competition?

Who wins when businesses "dump"? The consumer. True, some competitors face disadvantages when other countries subsidize their domestic businesses. Many American companies claim to support free trade, so long as it’s "fair." But a business cannot long survive by selling products below cost. And governments that provide subsidies burden that country’s taxpayers. Despite the "unfairness" to competitors, consumers benefit. And our own Congress continues to provide protection to American farm growers against foreign competition. And auto makers pressured Congress into forcing foreign automotive manufacturers into "voluntary" import quotas.

Opponents of "gouging" and "dumping" make the same argument — that government should halt a voluntary transaction between seller and buyer. It assumes the existence of some all-knowing, all-wise party with the judgment to guarantee that prices remain "affordable" or "appropriate" or "fair."

This is precisely why we have a market-driven system. It is known as capitalism.


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