How can firms actually save lives by price gouging in disasters?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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According to the most fervent believers in free market economics, price gouging can save lives (in some limited circumstances) in the wake of disasters.

To such economists, raising prices is a good way to ensure that no one buys more of a product than they really need.  Imagine a scenario in which there is a storm coming, no more gas can be brought to an area, and everyone will need at least a gallon of gas or two in their car.  If prices stay low, people will go to the gas station, and fill their tanks.  They will pump all the gas and the stations will have no way to get more.  Anyone who did not come soon enough is simply out of luck and gets no gas.  We can imagine that someone might possibly die because they don't have enough gas to go do something they needed to do.

Now, compare that with what happens if the gas station owners "price gouge."  They will raise prices very high and so no one will want to buy more gas than they absolutely need.  Everyone will buy a gallon or two and there will be enough gas so that no one has to go without.  The people who died in the previous scenario would now have a bit of gas and would live.

So, the idea here is that raising prices makes sure that no one buys more than they need.  That ensures that everyone gets at least some of the much-needed goods.  Since no one goes without (as they would if prices didn't drop), no one dies.

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