Is It Price Gouging or Good Business?

Q: In our community -- which is prone to bad storms and flooding -- local stores always raise the price of building supplies after a disaster. They are criticized for doing so, and now our city is considering a law banning "price gouging." How do you view the ethics -- and economics -- of this?

Ethics and economics are very different. Economics follows the amoral laws of supply and demand. And seemingly ethical behavior can sometimes have unintended negative consequences. Consider these questions:

Do the local stores collude to raise their prices in lock step, and by the same amounts? That's price fixing, and it's against the law in most places.

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Do the merchants quickly sell out their current inventory at jacked-up prices, shut their doors and go on vacation with their windfall profits? That's their right, but they're taking advantage of their neighbors' misfortune, which is neither compassionate behavior nor good business management.

Or do the merchants sell out their inventory and use the profits to place large, new orders with their wholesalers -- perhaps offering the higher price necessary to divert deliveries from other regions and make sure your community gets the big shipments it needs for rebuilding?

What if the retailers, instead of posting new prices on all their drywall, carpeting and plywood, conducted public auctions in their stores? Would it be unethical of some customers -- who have a greater need for the merchandise and are willing to pay more -- to bid up prices on the store's existing inventory? Would such an auction violate or simply skirt an anti-gouging law?

In light of all this, will an anti-gouging law help or hurt your community in a time of crisis? Sure, it will benefit the first few lucky buyers who get what they need at the pre-disaster price, but the next hundred customers may find empty shelves a week later.

Send your own money-and-ethics question to editor in chief Knight Kiplinger.