Prices on the real estate market in Los Angeles County confirm elementary economic theory. The economically illiterates seem surprised. See “Rent Rose by 10 Percent Across L.A. Country After Fires. That’s Illegal,” Washington Post, January 23, 2025. The Wall Street Journal writes (“After the Fires, Bidding Wars and Cutthroat Demand Take Over L.A.’s Rental Market,” January 16, 2025):
Renters are facing bidding wars and inflated prices, with some offering to pay above the listed rent or multiple months upfront. Landlords are taking advantage of the situation, raising concerns about price gouging.
On a free market in ordinary times, both suppliers and demanders are “price gougers.” Note that the expression has no analytical usefulness (it does not help understand the social world) and no relevance to an ethics of reciprocity between free individuals. The suppliers try to get as high a price as possible given the constraint of competition. The demanders on their side try to get as low a price as possible given that many of them are bidding it up like in an invisible auction.
On a free market, every price is the result of “gouging” from both the suppliers and the demanders. It is in emergencies that we see this more clearly. The supply of some good or service (say housing) is suddenly reduced—by the fires in Los Angeles County. Consumers, whose demand has not changed, face fewer apartments for rent or houses for sale than they want. The ones who attach more value to housing in the affected market—say, people whose employment place is in the vicinity or who have children in a local school—will bid up rents and house prices. Others will prefer to move to a smaller place or with their parents or friends, or to move farther away. In the short run, the supply of housing is fixed, so a rise in prices is how, in a free market, the available supply gets distributed. The consumers are the ones who bid up the prices. The suppliers obtain a windfall, as consumers get one when building activity is high (or when economic conditions suddenly favor their own businesses).
In the longer run, price increases will bring new housing suppliers in the market. By trying to profit from higher prices, “gouging¨” suppliers will gradually increase supply and push prices down. Note the crucial role of free-market prices: they signal both the intensity of demand among consumers and the cost of supply in terms of what the required resources (industrial land, labor, etc.) would produce elsewhere in the economy. (See the always interesting Ryan Bourne and Sophia Bagley’s “Gov. Newsom’s Price Controls Will Slow LA’s Recovery,” Substack, January 15, 2025.)
To the price mechanism, two alternatives or a mix of them exist: a permanent shortage—meaning the price is good but the shelves are empty—or some authority giving orders. A third alternative is tribal poverty. On price controls and shortages, think of the old Soviet Union, where the non-nomenklatura buyer faced a 10-year waiting list to buy a car, or the Stockholm housing market, where the waiting for a rent-controlled apartment is 8 to 10 years.
When market prices are capped by government, a free black market partially takes over for consumers who prefer to have the good rather than forego it and for suppliers who choose to sell at a higher price—especially since, at the previous price, they have more customers than what they have to sell.
To understand these conclusions, only basic economics is needed. Business people get an intuitive understanding of supply and demand, or else they don’t remain long in the market. There is nothing like actually learning the elementary theory of supply and demand: a demand curve slopes downward, a supply curve (generally) upward. Quantity demanded is read along the demand curve, and quantity supplied along the supply curve. When an emergency situation decreases supply, it’s the consumers who are doing the “gouging,” that is, the bidding; if there were no consumers, no price would be bid up. Imagine an auction where no buyer shows up.
The Washington Post story mentions the California Attorney General who, from the height of his economic ignorance and with power signs in his eyes, supports another system than individual liberty:
On Wednesday, California Attorney General Rob Bonta (D) announced charges against a real estate agent for allegedly attempting to price-gouge a couple who lost their home in the Eaton Fire. … The charge could carry a fine of up to $10,000 and one year in jail.
“These predators are looking at the disaster with dollar signs in their eyes,” Bonta said at a Jan. 16 news conference.
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DALL-E is not very literate either (I had to put the supply-demand graph myself on the screen and I could not persuade the robot to write “supply,” not “pupply”)
