“The Problem with Price Gouging Laws”

Michael Giberson

Regulation magazine, Vol. 34, No. 1, Spring 2011
Regulation magazine, Vol. 34, No. 1, Spring 2011

The Spring 2011 issue of Regulation magazine carries my article, “The Problem with Price Gouging Laws.”

One bit:

Economists and policy analysts opposed to price gouging laws have relied on the simple logic of price controls: if you cap price increases during an emergency, you discourage conservation of needed goods at exactly the time they are in high demand. Simultaneously, price caps discourage extraordinary supply efforts that would help bring goods in high demand into the affected area. In a classic case of unintended consequences, the law harms the very people whom lawmakers intend to help. The logic of supply and demand, so clear to economists, has had little effect on price gouging policies.

One of the reasons I’m fascinated by price gouging is that it involves a tight tangle of economics, moralizing, ethics, psychology, law and public policy. Most economists are persuaded by the supply and demand argument. Many non-economists rebel at the idea that merchants should be free to raise prices on goods that are in high demand due to emergencies. Working out good policy in this area presents some interesting challenges.

UPDATE: To see more posts on price gouging policy, economics, and analysis click here to search our archives: search for “price gouging” at Knowledge Problem.

Advertisements

6 thoughts on ““The Problem with Price Gouging Laws”

  1. To me, supposed price gouging poses the question: “In which situation are you better off”:
    (1) The goods you want are sold-out and unavailable at the previous, lower price, or
    (2) The goods are in stock at a temporarily higher price.

    In case (2) you can decide if the price is worth it. If the price is now too high, at least you know that other people in worse shape need that item more than you do.

    When merchants are punished by laws against price gouging, they have no incentive to plan ahead by stocking-up. So, if you individually have not purchased ahead, you are out of luck.

    No Price Gouging Here
    We’re Honorable, So We Don’t Have Any Stuff

    An allegory which explores the issues of price gouging. Such laws actually prevent merchants from preparing for emergencies. No profit motive and the possibility of prosecution dampens their desire to invest ahead. The community suffers.

    An allegory which explores the issues of price gouging. Such laws actually prevent merchants from preparing for emergencies. No profit motive and the possibility of prosecution dampens their desire to invest ahead. The community suffers.

    Also, a link to a small investigation about why gasoline prices vary when there is “no reason” for the changes, and a link to one of Michael Giberson’s other articles on price gouging.

  2. The usual meaning applied to “price gouging” does not imply any form of coercion. The situation typically involves a willing (if perhaps somewhat rapacious)seller and a willing (if somewhat reluctant and stressed) buyer. However, the buyer has the freedom to choose not to purchase the desired good from the seller. Granted that the potential buyer has a perceived “need” for the product or service offered by the seller. The seller, if he/she has purchased additional product to sell, has a real “need” to sell the additional product. The situation does not preclude negotiation with regard to price, since both parties have an incentive to “do the deal”.

    In many cases of “price gouging”, the desired product or service is only available because of the potential to earn a larger than normal margin on the sale.

    However, in the simplest terms, the action of the state in preventing “price gouging” functions to limit or eliminate choice, rather than to facilitate it.

  3. You’re right Ed. Folks like Michael Sandel will assert that ‘price gouging’ merchants fail to respect consumers in need when the merchant raises his prices, but as Matt Zwolinski explains in his work on the ethics of price gouging the anti-price gouging law fails to respect the ability of consumers (and merchants) to exercise their own wisdom in pursuit of their interests.

Comments are closed.