Refutation #2 -- Those Price-Gouging Insurance Companies

We frequently hear complaints about price-gouging business enterprises who have no opinion of the public except as sheep for slaughter. One particularly regular example is the insurance industry. Some believe that their prices are just "too high" and unfairly cost the public.

Well, think of the following example. Suppose your next door neighbor has a lemonade stand out in front of his house and is charging $5.00 (or any outrageous price) for a cup of lemonade. And suppose people are actually paying the price. You might be upset that he is "gouging" the public and letís say he is. What possible actions can you take to establish fairness?

One thing you could do would be to destroy the lemonade stand. That would be an effective way of getting your neighbor to stop gouging the public. We can call that the criminal solution since it rests on your willingness to commit a criminal act. It comes with the additional cost of an unsatisfied public who were enjoying lemonade before you vandalism.

A second solution would be for you to go to your township or county or state government and pass a law that would control prices. This is the socialistís solution. It rests on getting a majority of people together in order to restrict the behavior of a minority. It, too, can be very effective in reducing the price of lemonade, but there are certain additional consequences that go with it. For one, your neighbor might just retaliate against you in the same manner; that is, he might get a majority of citizens to vote to control some form of your behavior. The grievances here are endless and the result is an unproductive society. (I know this is all theory, but there have been experiments run on the socialist model and the results are in--socialism is a bad way to run an economy.)

So what is one to do about that neighborhood price-gouger? Well, there is the capitalistís solution: Open up your own lemonade stand at a lower price than your neighbor, but high enough to make profits. If you can do that, you have accomplished your aim. If you canít, then it had to be the case that your neighbor wasnít charging such a high price after all.

Again, think back about complaints against the insurance company. If an insurance company is making abnormally high profits in a free market, then there is opportunity for the complainers to start their own insurance companies, lower insurance costs, and get rich in the process. Talk is cheap. Those with a legitimate gripe will take action.

But it is entirely possible that insurance companies are making abnormal profits because they are not operating in a free market. This is the case when governments enact legislation that restricts trade in the insurance industry. The solution in this situation is manifest: eliminate the government intrusion; restore the free market.


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