Profiteering (09 Jul 2005)

Profiteering is good. I just thought I needed to point that out in the light of this: "Vow to shame any owners caught profiteering".

Economics is the study of the allocation of scarce resources. Capitalism is the best solution that we have to that problem. It has problems (imperfect information, corruption etc) but fundamentally the laws of supply and demand work better than anything else that people have tried.

Many people feel uncomfortable that hotels should profit from a disaster in some sense of solidarity with the victims. Solidarity is fine, but I don't think that means that everyone must have a bad day because some people did. Anyway, getting back to the point.

When the demand for something rockets (as it did for hotel rooms in London on Thursday) hotels could keep their prices the same. In that case there will be a shortage of rooms because rooms will be allocated nearly on a first come, first served basis. Some people might be able to walk home but will decide not to bother because a hotel room isn't all that expensive. Other's, who cannot get home, can't get a room because they have all gone. I don't think anyone would imagine that that's a good scheme.

So when hotel prices go up some people will decide that they value their money more than the comfort of not having to walk home. Those left in the hotel will be those who value the hotel room more. In a world of perfect information there would be no shortage of hotel rooms because the price would rise such that demand was suppressed to the level where it could be met exactly.

And yes, that means that wealthy people might be able to get hotel rooms where less wealthy people might not. That's the reality of wealth and I would hope that most people know enough history to know that the alternative is much worse.