A year ago July, I sent my girlfriend some flowers. I picked up the phone, called a florist, and, for about thirty dollars, she received one dozen roses. Seven months later, for Valentine’s Day, I called the same florist and again ordered one dozen roses for my girlfriend. This time, however, they would cost one hundred twenty dollars.
I was floored. “A hundred and twenty bucks!? You can’t be serious?” But the clerk assured me that he was and as this was the big day for roses, I could expect that price everywhere and I might as well warm up to the idea. Of course, I forked over the money. But why was this happening?
Rose producers supply a fairly constant demand of roses throughout the year. However, when Valentine’s Day arrives, the demand for their product increases by a huge amount. Since roses cannot be stored for long periods of time, rose producers must hire seasonal workers to assist them and they must make preparation for their good to be completed and on the market at just the right time.
Even though more roses are produced for Valentine’s Day than at any other time of the year, the increase in supply is by no means as great as the increase in demand, hence the higher price for roses.
Allow me to state this again. Even though the wholesalers of the roses know that Valentine’s Day is approaching, the price at which they sell to retailers will rise because demand will increase relative to supply.
Because consumers are willing to pay the higher prices, producers are willing to incur higher costs associated with meeting the demand. In the end, the market for flowers at Valentine’s Day is fully coordinated, with neither systematic shortages or surpluses.
Now, take a look at a press release by Associated Industries of Florida from September 23, 1998.
“Associated Industries of Florida (AIF) reminds businesses that it is illegal in Florida to increase prices above the normal price level in times of impending disaster or after disaster strikes. In other words, as the hurricane approaches Florida, all businesses should retain their present prices on all items.”
This is, of course, Florida’s response to the act of price gouging. “It is illegal in Florida to increase prices above the normal price level in times of impending disaster or after disaster strikes. “
The obvious next question: why is the act of increasing the price of a good in response to an increase in demand illegal after a hurricane but not at Valentine’s Day?
Men, if you didn’t show up with a dozen roses for your wife or girlfriend on Valentine’s Day, disaster would strike. There is nothing we can do but grin and bear it because the price system is working exactly as it is supposed to do. It is positioning itself in a way that the people who most highly value the roses are the one’s who will buy them.
Now, go back to the hurricane. It passes through Florida leaving most residents without power. Jim, the doctor, has $400 worth of meat in his fridge that will spoil if he doesn’t get some ice. So he goes down to the market where there just happens to be 1,000 bags of ice for sale.
Unfortunately, due to Florida’s laws concerning prices, the ice is still priced at one dollar per bag and there is a line of 1000 people ahead of him. Jim can’t wait in line. His time is too valuable (both as a doctor to people who need his services and in reference to lost wages if he stayed in line). Therefore, Jim loses all his meat even though he would have gladly paid $100 for a bag.
I hear what you’re saying: “What about all the poor people (and not so poor people) who can’t afford $100 for a bag of ice? What would they do?”
As I said, there was only 1000 bags at this market (which I believe is being generous—usually when I look in the ice bin at the store, there might be 20 or 30 bags at the bottom, half of which are broken). So 1000 poor people (who have time costs low enough to spend a couple of hours in line) get a bag of ice. What about all the rest of the poor in that neighborhood? What will they do?
If ice had been allowed to rise, and ice producers allowed to make high profits, people with ice or with trucks from all the neighboring states would have headed to Florida with hopes of making a quick buck. But when they all arrived (and there would be many) the normal forces of supply and demand would push the price of ice back down to a more agreeable state.
So, in the real world (with anti-price-gouging laws) the first 1000 people get ice while everyone else is out of luck for what could be weeks while their world slowly returns to normal. However, if the price had been allowed to fluctuate (even up to $100 a bag) only the people who valued it the most would have received it on the first day, but by the second, trucks would have been rolling in from all over the US and by the end of the week, prices would have returned to a more normal state.
In 1928, Lenin began his, “revolution from above,” in an effort to transform the Soviet Union into a socialist state. This consisted of nationalizing heavy industry, forcing farmers into, “collectives,” and attempting to control it all through central planning. That is, he was doing away with prices and allowing the central government to decide what and how much should be produced.
This plan of, “playing market,” as pointed out by the economist Ludwig von Mises, would not work. By eliminating the key signal in any market (prices), socialism would be doomed to fail. And by eliminating the ability of prices to do their task in Florida after a disaster, our central planners delayed clean up by keeping prices artificially low.
So, with Valentine’s Day rapidly approaching, I am happy. Even with the increased demand, the flowers I want will be available now because the price system works. I just hope that, in the future, my fearless leaders don’t freeze prices on roses in the name of, “fairness.” Otherwise, my sweety may be getting her Valentine’s Day roses on labor day.
