Is Price Gouging Is Unjust?
Price gouging is a topic that comes up in times of crises. Typically, the corporate media or politicians bring it up after a natural disaster such as a hurricane, tornado, or a flood. It refers to when a company, almost always a gas station, increases prices in the immediate aftermath of a crises. People believe this adds insult to injury since they just made it through a horrific event and now they have to pay more for something they buy every week. They tend to expand on their argument by claiming it traps them in the area that was just ravaged, because they can't afford the fuel to evacuate. This is the typical cry from progressives and media personalities on why the act of increasing prices must be criminalized, but, like most progressive arguments, it only works on the weak minded.
It’s an easy argument to be made because the American people want to treat people fairly and, on the surface, this argument does just that. They see it as the big oil companies making huge profits while the people suffer. No one wants to see suffering, but there are far better ways to help the needy than to upend the free market system. Especially when hurricanes don't occur every day. The reason people get upset by this is because they have an expectation that prices are fixed or stable. They believe this because we generally have a stable society where prices only fluctuate between +/- 2% (just a guess) and inflation rates are generally shallow, upward curves. We have enjoyed this stability for a long period of time. For a large portion of Americans, we have enjoyed it for our entire lives, so of course we have come to expect this behavior in the market. But this is a blessing, not normal market behavior. The consumer doesn't take the time to go below the surface level of the argument and understand why the business increased their prices.
Let's just look at this situation from the outside and try to engage in empathy toward the supposed wrong-doers. What would cause a business to increase prices? For any business there are costs incurred. If those costs increase and prices stay flat, their profits will decrease. When a farmer sells his crop at a farmer's market, he must first pay for seed, fertilizer, pesticide, irrigation, and fuel. These are typically referred to as direct costs. Then, he must pay for labor, taxes, property loans, and a booth at the market. These are typically referred to as indirect costs. When all costs are added together, you get a total cost of running your business. The goal of any business is to make more money than you spend. The money you make is called revenue. When you take your revenue from the farmer's market and subtract the total cost, what you have left is called profit. This profit can be use in different ways: goes into your pocket as take-home-pay, allows you to expand your business by buying more land or hiring more employees, helps cover variable expenses such as fixing broken equipment, or helps pay off any debt you may have accrued. None of these uses of profit are evil. Not to mention, this scenario is the best case scenario for a business. Most businesses lose money the first few years of operation and business conditions are always fluctuating. You never know if you will have a profit or loss in any given year. Many businesses hold on to cash during good years as a rainy day fund to get them through the bad years. This keeps the business afloat and keeps people employed, thus adding to a stable society.
Now, let’s look at the gas station example. Gas stations are generally run by individuals who buy into a franchise. A QT (QuikTrip) franchisee is expected to pay between $25,000 and $30,000 as an initial investment or franchise fee. QT also expects each new franchisee to have liquid cash on hand to cover any running expenses of $25,000. Already, a franchisee must have $50,000 just to get started, then he must pay a royalty fee of about 5% of the monthly gross revenue[1]. Remember, revenue is the amount of money incoming, not profit. Now, managing a QT can be profitable and it is generally worth the investment, however, the franchisee is starting in the hole by $50,000.
Let's now consider profit margins. They are slim. The average cost of fuel is about $3.14[2] and a fueling station under normal conditions expects to make about $0.21 a gallon on gas[3]. Who sets the prices? The gasoline suppliers[4]. Every day the oil company tells the station owner the price he will have to pay for the fuel. If the supplier increases the price by $0.05, the station owner may decide to chance the lower price he is charging to sell more gas in his market or he will be forced to increase his price by $0.05 and keep a stable profit for his store. The suppliers drive the cost to the station owner and the station owner sets the prices to the consumer. If the supplier increases their price, the station owner must increase his price or go out of business.
Now, what happens when a crisis occurs? When a crisis occurs, everyone goes and buys gasoline, even if they don't need it. This dries up the supply quickly. As the supply goes down at the local station, the station owner must order more gasoline from the supplier to refill his stock. The problem is, all the gas stations in his market are doing the same thing at the same time. This puts a strain on the supplier to get enough gasoline to all of the stations. This also puts a strain on the number of drivers to get it to their destination. This forces employees and drivers to work over-time which drives up your overhead and labor costs. Sometimes this could easily require 1.5-2x the cost of normal conditions. This drives the cost to $6.28 a gallon. What do we expect the station owner to do? The media, progressives, and other imbeciles expect him to lose his shirt. The oil company isn't losing out, but the owner of the store is. Some know the game and just choose not to order more fuel. They just close up for a couple of days because it would cost far less than remaining open. Now, the consumers that cry when gas goes up by $0.15 during a crisis, can't get any gas and the ones who really need it, like trucking companies who deliver food to grocery stores, can't get it either.
This stupid argument that prices shall remain fixed keeps us from getting the fuel, food, and other necessities during a crisis. It causes hardworking people to lose money or become demonized by the community. It only goes to prove that this argument is wrong by the way it is so sparingly applied. We seem to only apply this standard to gas and grocery prices, but we never apply this standard to stadiums and ballparks. We accept $6 bottles of water and $10 hotdogs at these locations every day and they don't even have the excuse of a crisis. What about the prices you get at kiosks in the mall or airports? What about when Tory Burch decides to charge $250 for a pair of flats that you could get for $12 at Target? Is that price gouging? No, they're just prices. If you don't want to spend $250 for a pair of flats, don't. No one is coercing you. If you don't want to spend $6 a gallon for gas, don't. No one is putting a gun to your head.
In a free market system, the market drives the price. If the market doesn't accept your price, you either lower the price or cease offering that product. If one gas station "overcharges" for gas, the one down the street may offer a lower price. The more competition will bring the price down, but the less competition, or less availability will drive the price up. We need to be OK with both situations if we are to operate in a free market system. If not, you get communism and that is far worse.
Politicians are always looking to make themselves heroes; therefore, they are always happy to oblige us in our worst impulses. The same goes for our corporate media sources. They want you to be outraged. It makes them more money. They don't care about your well-being; only about lining their pockets. If they have to blame someone else of lining their pockets, they will. It is up to us to be responsible, think about these ideas critically, and be the people our founders expected us to be.
We experienced this last year during the Covid-19 pandemic. As supply chains were narrowing and some businesses were shutting down, people were buying up products they thought people would need (i.e. toilet paper, bleach, hand sanitizer). Once they began offering these products for sale, at higher prices of course, some governments confiscated these supplies from the business owner. Not covering their initial investment, but just stealing the supplies from these entrepreneurs. What was their crime? Nothing. They just charged more than the grocery store would have charged. But, the grocery store was out. The grocery stores weren't charging anything and had no product to offer. No one was forcing people to pay $15 for a 5 oz. bottle of hand sanitizer. If someone valued hand sanitizer more than they valued $15, they would be happy to pay those prices. Who is hurt by this? We need to do more critical thinking and stop believing things just because someone said it.
Ajaero Tony Martins CEO / Publisher at Profitable Venture Magazine LtdAjaero Tony Martins is an Entrepreneur. “QuikTrip Franchise [Cost, Fee & Requirements for 2021].” ProfitableVenture, 14 May 2021, www.profitableventure.com/franchise/open-quiktrip/.
“State Gas Price Averages.” AAA Gas Prices, 6 Nov. 2017, gasprices.aaa.com/state-gas-price-averages/.
“Fuel Sales.” Convenience.org, www.convenience.org/Research/FactSheets/FuelSales.
“Who Sets the Gas Prices In Individual Gas Stations?” Thetruthaboutgasprices, 5 June 2008, thetruthaboutgasprices.wordpress.com/2008/06/05/who-sets-the-gas-prices-in-individual-gas-stations/.