The Case For Price Gouging - Even In A Crisis

Price gouging spurs production, prevents hoarding and encourages conservation.
By Scott Beyer | Mar 30, 2020 |
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By Scott Beyer | Mar 30, 2020 |
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[This article was originally published by the Independent Institute]

Every natural disaster in America raises the same dialogue on price gouging. Whether it’s hurricane evacuations or 100-year floods, businesses respond by raising prices on essential goods that have limited supply but suddenly-high demand. The economists of the world defend this behavior, while the public lashes out and regulators crack down.

It’s been no different during the spread of COVID-19, which has led to thousands of consumer price gouging complaints, and cities and states enforcing their anti-gouging laws. New York City, according to a Daily News report, has already stuck local businesses with $275,000 in fines. These crackdowns came as 311 complaints rolled in about $79 bottles of hand sanitizer and $15 bottles of disinfectant. These fines will only intensify nationwide as price gouging occurs on far more crucial medical supplies like respirators and surgical masks.

These crackdowns will be a disaster, worsening shortages of critical products, and ultimately harming even those most in need.

If governments were to allow so-called “price gouging”—which is less the conspiracy it sounds like, than an organic price shift due to market changes—it would actually help with the scarcity caused by COVID-19. The sudden extreme markups would encourage more production, less hoarding, and better conservation, leading to greater supply, a slowing of price inflation, and finally lower prices.

More Production

Prices in a market economy are a form of information. When the prices of a product suddenly jump far beyond its normal retail value, that signals to producers that demand has far outstripped supply, and more product is needed. Some of the production increase will come from traditional manufacturers—for example Gojo Industries, which makes all kinds of skin care products, including hand sanitizer, might shift its investment towards the latter after seeing that bottles sell for $79.

Perhaps even more notable is that people who don’t normally make hand sanitizer will join in on the production. Since the crisis, many distilleries—highlighted by Anheuser-Busch—are making hand sanitizer instead of beer and liquor. Other private citizens are buying the raw materials and making it themselves. As Matt Zwolinski, director of the University of San Diego’s Center for Ethics, Economics and Public Policy told MarketPlace.org, “when the price of vital goods goes up in an area affected by an emergency, that sends a signal to areas not affected by the emergency to bring more.”

We’re now seeing precisely this market outcome, as nascent entrepreneurs across America manufacture hand sanitizer and surgical masks.

Less Hoarding

Price gouging during a crisis also prevents runs on the market. Without the gouging, people who first suspect there will be a shortage of something (i.e. toilet paper) rush out to buy it in bulk. This is panic purchasing – buying far more of something than the household will likely need, in the doomsday scenario that there will be a permanent shortage. This becomes somewhat of a self-fulfilling prophecy, as temporary shortages then occur for those who didn’t rush out and buy.

When companies respond by gouging the price, it makes this hoarding more expensive, thus less common. There will be more product for everyone to buy, and at a reduced consumption rate because of the higher prices. In this sense, price gouging has a certain ethical logic—a higher percentage of people get access to a scarce good, rather than a fraction of people hogging it.

Better Conservation

Who among us has ever thrown away a bottle of something—hand sanitizer, toothpaste, lotion, etc.—without squeezing out every last drop? I assume everyone. How many of us would do that if the bottles cost $79? Likely none.

This speaks to the conservation that occurs in a climate of scarcity and “price gouging.” People suddenly become more economical and less wasteful of a good, leaving more of it around for others.

“Conservation” here can also mean more efficient delineation of goods, away from those who don’t really need it to those who do. The high pricing—and the willingness of certain people and not others to pay it—is what drives this process.

Take the gasoline situation in Texas during Hurricane Harvey. Because refineries were shut down, and 3.7 million people needed to evacuate metro Houston, there was a gas shortage, and per-gallon prices rose to $5 or more (which led the state to fine some stations).

But this “gouging” was a good thing: Texans who were removed from the crisis were less likely to over-consume gas for non-essential uses like vacations. This left more gas available for Texans who were evacuating to save their lives, and were willing to pay the higher prices.

This market-driven usage, based on the needs of different people, seems far more logical and efficient than the distribution methods a top-down bureaucracy would employ.

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Nonetheless, policymakers thrive more on indignation than logic when it comes to the price gouging issue.

“It is not time for profiteering,” declared New York City mayor Bill de Blasio recently. “It is time to be a good citizen and help your fellow New Yorker.”

But profit is the motive for why goods and services are provided across the U.S. That motive won’t disappear just because we’re in a crisis, and the prices themselves will rise due to higher demand. Expecting that providers will be “good citizens” and deliver their products at a loss is naive; forcing them to through law will just cause shortages.

To that point, there are already reports of New York City stores that won’t sell sanitizer. Their upstream suppliers have jacked up prices, and store owners are afraid that raising their prices above the wholesale price, to earn a profit margin, will bring fines.

If such price-control zealotry happens throughout the COVID-19 crisis, we can expect to see far more of these shortages nationwide.

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