Evil Price Gouging

This is such a popular term right now. People just hate it when others make money. For the record - I don't think price gouging is really even possible, and if possible, I'd like to make the case that it is a good thing rather than an evil thing. I don't need to sum up the entire thing - John Stossel made the case well in this article: In Praise of Price Gouging.

In another post I wrote that prices that move freely in response to market demand allow for the movement of resources to where they are needed most.

I'd like to make another point now - most of us are evil price gougers. In news reports those that price gouge are considered the worst sort of human beings. Do you realize that belief makes the average home owner an evil price gouger when he sells his home?

When we list our home on the market, we check to see what houses are going for in our area and typically price our home based on what others are asking. However, if you've owned your home a few years and have some equity in the house, why not sell it for what you owe rather than what the market will bear? Maybe you owe $100,000 on the house and its worth $200,000 according to the market. Isn't it price gouging to ask for $200,000 when you only need $100,000 to break even. Why do you need to make so much profit? Isn't that greedy?

Aren't we asking the oil companies to stop making so much profit? They only owe $3.00 on that gallon of gas, yet they are charging $3.10. The public thinks its evil for them to make that extra ten cents per gallon. Why is that any different than the home owner who makes a large profit on the sale of their home.

It is a good thing for people to sell their homes for what the home is worth. First of all, if everyone charged what they owed, there would be a shortage of homes on the market. The price equalizes supply and demand ensuring that there are just enough homes on the market to meet the demand of the market. Taking the profit out of a home also allows the home owner to "buy up" into a better house next time, making lower priced housing available to new home buyers. The home becomes a store of wealth.

All the same things are true for any other business that charges market prices. They will sometimes make a great profit because their costs are less than market prices. A rise in market prices doesn't make a seller evil, whether they are selling corn, houses, cars, or even fuel. We all charge what the market will bear for whatever it is we have to sell. How could it work any other way?


Technorati Tags: Price Gouging, Prices, Economics