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VICTOR JOECKS: To fight coronavirus, Costco needs to price gouge

Empty shelves at Costco and Walmart show that Las Vegas-area businesses need to start price gouging.

The coronavirus has arrived in the United States. There are many unknowns. How quickly will the virus spread? How deadly will it be? Will it shut down schools, stores and sporting events?

As I write, the CDC’s risk assessment seems contradictory. It says that coronavirus poses a “low” risk for most Americans. It also says “that current global circumstances suggest it is likely that this virus will cause a pandemic.”

In the face of uncertainty, it pays to be prepared. Swarms of Las Vegas residents have done just that. They’ve descended on local Costcos and Walmarts to buy as much toilet paper and bottled water as they can get their hands on. Empty shelves are now commonplace.

Consider Alaina Ortiz. She and her husband went to Costco on Monday and bought ten cases of bottled water, as the Review-Journal reported. That’s so much water, she called it “overkill.”

But Ortiz’s precautions mean that many shoppers who came after her weren’t able to buy similar supplies. Costco quickly sold out of bottled water and toilet paper.

Fortunately, other stores still have those items. But if — God forbid — an outbreak of the virus leads to a shortage of drinking water and toilet paper, this type of hoarding would be extremely destructive. Some people would have an abundance, while others wouldn’t have any. A lack of drinking water could be deadly.

The best way to prevent this is for stores to raise prices in the face of an impending disaster, like a hurricane or deadly contagion. On the face of it, it seems cruel to make people facing a difficult event pay more for necessities. If supplies were unlimited, this feeling might be justified. But supplies are limited, especially when demand spikes. Price hikes could help make certain goods available to more people. The alternative to price hikes is that some have too much and others don’t have any.

The key thing to understand is that prices aren’t just numbers representing costs. They provide vital information about supply and demand. In normal circumstances, when demand increases or supply drops, prices go up. If demand drops or supply increases, prices go down. These price changes act as signals to consumers and producers.

Imagine that the price of eggs doubles after a virus infects the nation’s chickens. No one wants to pay more, but the higher price tells consumers that eggs are scarce. They’ll adjust accordingly. Some will have bacon for breakfast instead. Others will look for recipes that don’t use eggs.

Dynamic prices are what allow free markets to distribute resources so much more efficiently than central bureaucracies. Adam Smith labeled this the “invisible hand” of the market.

During a crisis, these types of price hikes serve the public good. Consider the online sellers of the N95 respirator masks that people want to shield them from exposure to the coronavirus. The CDC says that only those in health care settings need those respirators.

When the masks were available at normal prices, the public bought them out. Those who need the protection the most can’t get it. Now online re-sellers have made masks available for up to five times the normal price. The high price send a signal: These items are scarce. If you’re a normal person, the high price will likely prevent you from buying. If you work in a hospital, the high price could be worth it because your risk is much higher.

Raising prices during a crisis shouldn’t be denigrated as price gouging. It’s what allows limited resources to be best spread out among the entire population instead of hoarded by those who arrived at the store first.

Victor Joecks’ column appears in the Opinion section each Sunday, Wednesday and Friday. Listen to him discuss his columns each Monday at 10 a.m. with Kevin Wall on 790 Talk Now. Contact him at vjoecks@reviewjournal.com or 702-383-4698. Follow @victorjoecks on Twitter.

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