I recently moved into a new apartment in Los Angeles, and like many apartments in the area it doesn’t have air conditioning. Because it’s nicely shaded, I was hopeful that I might be able to get by without A/C, and indeed the apartment is habitable well into the 80s. Unfortunately, the current heat wave (the daytime high today is 95°) has burst my bubble of optimism, and I’m now in the market for a portable air-conditioning unit. Today I went looking for one, and, predictably, all the area stores are sold out. The reason is that they refuse to engage in price gouging, and that really sucks.

The vilification of price gouging comes from a more general misunderstanding of price. People seem to think that either buyers or sellers set prices, though which one depends on the circumstances and their political leanings. Evil corporations such as Wal-Mart lose either way, since in the popular imagination they set both the price of the labor they buy and the price of the merchandise they sell. Of course, what they really set is either the bid price (the price they’re willing to pay) or the offer price (the price they’re willing to be paid); whether the transaction goes through depends entirely on whether there is a seller or buyer willing to meet the price.

Ultimately, price is set not by buyers or sellers acting in isolation, but rather by the interactions between buyers and sellers. This mechanism operates at a higher level of abstraction than individual agents, which evidently makes it much more difficult to understand, and makes the consequences more difficult to accept. Consider: Wal-Mart doesn’t set the price of labor, and hence can’t be blamed for the low wages of its employees. (Chew on that one, and try not to choke.)

In the case of price gouging, people’s intuition tells him that there is such a thing as a “fair” price, and anything greatly in excess of that price constitutes gouging. But price is a real thing, and you can’t hide from it. Charge more than the real price and you’ll end up with a surplus; charge less, and you’ll end up with a shortage. Evidently, the local stores are charging too little, because they’ve run out of air conditioners. The reason this sucks for me is because I am willing to pay more than most other people. In other words, I want to be gouged.

Setting the wrong price also leads to a misallocation of resources. This sort of misallocation is particularly severe in exactly the situations most likely to spawn accusations of price gouging, namely, emergencies. People may decry high water prices in the aftermath of a hurricane, but such prices create a critical financial incentive to use potable water only for drinking, rather than for less important uses such as cooking, cleaning, or bathing. (Of course, high prices also give an incentive to get more water there, and fast.) In my case, I want a cool room so that I can better get work done, but I’m sure some people who did manage to acquire air conditioners just want to sit around and watch TV, which seems to me a less important use—and I’m willing to put my money where my mouth is.

There remains an interesting question: why don’t Costco, Home Depot, and the other stores I visited engage in price gouging? I’m not sure what the answer is. Perhaps it’s just too much trouble to change prices dynamically based on demand, but it’s more likely that they fear alienating their customers, who might be offended by price gouging, or maybe they fear government regulation, since politicians are elected by voters who might be offended by price gouging. In either case, it looks as if I may be the victim of economic ignorance. Please, somebody gouge me!

Damn, it’s hot in here.