In the wake of the (COVID-19) pandemic news outlets and politicians alike are discouraging everyone from price-gouging and hoarding. The question is why? We are told that to raise the prices during a crisis such as a natural disaster or a pandemic is cruel and unethical. However, as any good principles of economics student can tell you, price gouging laws only create price ceilings and shortages of goods. No one is directly calling for the capping of prices on goods during these times of crisis, but price gouging laws are effectively the same. Producers are afraid of raising prices for fear they may be reported as price gouging, and in many states, the burden of proof is on the producer to demonstrate they did not engage in price gouging.
The issue at hand is an old one in economics that people keep failing to learn. Prices are signals that contain information and incentives and help to ration goods. F.A. Hayek demonstrated that we do not have to know why prices are rising to understand how to behave. As consumers, we economize on goods, and producers understand that there is a greater demand for the product and should offer more to the market. What price gouging laws cannot do is change the scarcity of resources as Michael Munger explained to us years ago after Hurricane Fran. Instead, we have to find new ways to allocate scarce resources like waiting in line for first come, first served, or worse discriminatory practices. Yes, this sometimes forces us to make hard choices as to whether we should forgo the beer for toilet paper (or maybe it’s the other way around).
Preventing prices from rising only creates confusion among producers and consumers. Producers do not receive the necessary signal that more products should be supplied, especially if one area of the country is affected more relative to another, such as after a natural disaster. We should allocate more resources to those areas affected, bringing their prices down and increasing prices in other places to signal the relative scarcity. While we are all suffering from this pandemic, maybe the area first affected or areas of more cases should have had more hand sanitizer or wipes supplied to them. However, without the right price signals, how will we know? People hoard (I dislike this term almost as much as price-gouging) because they have been incentivized to do so. The product is still cheap, and so they buy more than they need in anticipation of higher prices or shortages in the future. However, higher prices are more effective at encouraging people to purchase only what they may require, or can afford, than the pleadings of government officials.
We are told that business people should not be greedy during times of crisis and not engage in profiteering. What exactly does that mean? Allowing markets to create the right signals does not necessarily imply excessive profits (if we even know what the means). The price signals and profit opportunities will only lead suppliers to find ways to make the product more available and drive down prices faster. We can debate about whether individuals like the man in Tennessee who drove all over the state purchasing hand sanitizer and other products to sell at a higher price are simply responding to arbitrage opportunities. I would argue that this is also an unintended consequence of price gouging laws creating unnecessary secondary markets where people attempt to raise prices, and sometimes engage in unscrupulous behavior.
Are rising prices and profiteering the only way that businesses respond to a crisis? If you ask politicians, most journalists, and even your neighbors, they would probably say yes. Adam Smith in the Theory of Moral Sentiments wrote that people not only want to be praised but praiseworthy. High prices can motivate people to be praiseworthy. (David Henderson spoke about doing just that in his recent AMA.) Business leaders and entrepreneurs are often on the front line of providing goods and services during a crisis. A few examples include Budweiser switching their production from beer to water following Hurricane Florence to send to victims in North Carolina, South Carolina, and Virginia. Short-term rental giant Airbnb was able to use its network to provide free housing to people during Hurricane Dorian when hotels could not accommodate all the individuals needing shelter after evacuating their homes. Finally, in the current crisis, online platforms such as Zoom are providing access to their product for free so educators can teach online. Still better, entrepreneurs are adapting to the circumstances to help solve problems as in the case of the distilleries that are turning high-proof alcohol into hand sanitizer. Chad Butters brewery founder stated “The right thing to do is support this community by providing something that is in desperate need. We’ll flood the valley with hand sanitizer and drive that price right down.” Whether he fully understands it or not, high prices are doing exactly what they should be doing in this situation- moving resources to where they are most valuable.
What is the best thing we can do in a time of emergency or crisis? We can, of course, be kind to each other; businesses and individuals can engage in philanthropy, but more importantly, we can let markets function to provide proper price signals and allocate resources where they are most desired. If you think that price gouging is a problem or unethical then consider Matt Zwolinski’s argument to the contrary. More importantly, when you are staring at the empty shelf in the store, ask yourself are the low prices, the threats of legal action, and the pleading not to hoard by state officials truly helping to solve the problem?
Peter Calcagno is Professor of Economics at the College of Charleston and Director of the Center for Public Choice & Market Process.
READER COMMENTS
Phil H
Apr 1 2020 at 2:29pm
I have one very half-hearted defence of price-gouging rules: price gouging should be impossible when there are well-functioning markets; the existence of gouging demonstrates that the market has (temporarily) failed to clear; in those circumstances, government intervention in a market would be less harmful, because the market’s broken anyway. In the covid crisis, this might apply because competitors to current market participants are prevented from starting up because of the lockdowns.
But in practice, I don’t think that holds up. We do need new businesses to start, so new market entry must still be possible. And if my defence doesn’t apply now, it’s hard to imagine situations where it would apply.
Jon Murphy
Apr 2 2020 at 10:11am
I don’t understand this defense. “Price Gouging” is the mechanism by which the market clears; it cannot be a sign that the market has failed to clear unless we assume that there should be no change in price in response to a change in supply/demand.
Thaomas
Apr 1 2020 at 2:49pm
I think the criticism of “price-gauging” rules demonstrate one very general and one idiosyncratic problem with much Libertarian punditing.
The general one: Many libertarian pundits are so caught up in “understanding” the inefficiencies of anti-price gauging laws that a) they argue as if only they understand those inefficiencies and b) they also forget that the “efficient” price change also redistribute income and seldom from the rich to the poor.
The idiosyncratic one: The pandemic has thrown up a gazillion examples of (legitimate) violations of Libertarian principles: bailouts, restrictions on testing, closing of businesses by category and by fiat. Yet the amount of ink devoted to denouncing anti-price gouging laws (with little sense of whether they are being enforced or not) in relation to other market distortions is WEIRD.
Mark Z
Apr 2 2020 at 6:07pm
Even assuming you’re right about efficient pricing redistributing income upwards, how does this vindicate price gouging laws? Especially during a crisis I would think distributional concerns would take more of a back seat to absolute wellbeing, which is almost certainly negatively affected. I imagine people are less concerned about Jeff Bezos’s net worth relative to the availability of food and hand sanitizer now more than ever.
And I don’t think there’s anything ‘weird’ about the concern: even if not the most damaging policy, price controls are just about the most basic violation of free market principles and thus perhaps the class of economic policy many libertarians are most confident will be inefficient. They also have already caused considerable harm by inducing domestic mask sellers to sell abroad instead, worsening the scarcity here, so they’re by no means innocuous.
Dylan
Apr 2 2020 at 6:36pm
Here’s one half-baked idea about this. During normal times, we’re more or less OK with rich people getting better things than normal people, they can have a better car, or waterfront property, or what have you, even better healthcare in some respects. And it is equally understood that poor people are going to get less of those things, but they’re not normally assumed to fall into the life or death category. Different people of course have different opinions on how OK this is, but at the “median voter” level we’re more or less OK with the way the market allocates things.
During a crisis, I think our intuition swaps and we want pretty much the exact allocation that happens in normal times. It’s not just that we want everyone to be treated equally, I think we actively want the poor to be able to be more favored and the rich to go to the back of the line. Price gouging laws on the surface seem to get us slightly closer to that, as many libertarians point out, that just moves the rationing to not be based on price, but on time and who has the most time to wait in line. Of course, the wealthy usually come ahead in this kind of rationing too, either because they can afford t o wait, or because they have resources to get things through connections or other means, and it ends up making more people worse off, but it is less visible. Unless you can figure out a way that the wealthy won’t come first when there are sudden scarcity issues in a crisis, I don’t think you’ll be able to get over the popularity of anti-gouging laws.
Maniel
Apr 1 2020 at 11:47pm
Agree with the post. No matter the situation, the law of supply and demand is difficult to repeal.
Don Boudreaux
Apr 2 2020 at 3:39pm
Phil H: I think it incorrect to write, as you do, that:
Higher prices are evidence that markets are indeed well-functioning. We observe so-called “price gouging” when supplies fall relative to demands – and, typically, when this outcome is caused by a simultaneous decrease in supply and increase in demand. When supplies fall relative to demands, prices should rise. Evidence of a poorly functioning market would be the absence of price increases under such circumstances.
Nothing in the concept of a well-functioning market requires that supply increase instantaneously – or even ‘quickly’ – to offset any increase in demand such that price is maintained at its ‘normal’ level.
Put differently, because nothing in the concept of “well-functioning market” assumes or requires that supply and demand always intersect each other at some one given and long-standing price – because nothing in the concept of “well-functioning market” remotely is at odds with supply and demand shifting relative to each other such that the price at which today quantity demanded equals quantity supplied differs from what that price was yesterday – nothing about so-called “price gouging” is evidence of a poorly functioning market. Indeed, a central part of the very notion of “well-functioning markets” is prices moving up or down as quickly and as far as possible to clear markets.
Thomas Sewell
Apr 2 2020 at 9:16pm
People mostly consider that higher prices might attract more goods in the event of a disaster, but to add a few additional notes on the impacts of price gouging laws regarding preparation…
Without them:
People who are able to anticipate disasters earlier (I saw it coming!) can take actions ahead of time which will mitigate the impacts. The way they pay for those actions is to increase prices, currently banned.
People who plan ahead and prepare for disasters, by stockpiling essential items, ready to go, serve those who aren’t prepared. They’re rewarded by increased prices.
Anticipatory higher prices can also signal farther in advance when a disaster is more likely, alerting others sooner, who can then prepare.
All of these types of activities, when legally allowed, end up not driving up prices massively, but moderately. That’s because if everyone is allowed to engage in them (rather than on the black/gray market), then the returns, like other businesses, attract more people to do them until the return on time/resource/monetary investment is in line with the risks and the rest of the economy.
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