By Peter Clark
The practice of price gouging has become a concern in the wake of the COVID-19 pandemic. Many consumers are stockpiling essential goods ranging from food, medical supplies, to even toilet paper. A natural consequence of a sharp influx in demand is a substantially larger price tag, falling within the parameters of the immutable Law of Supply and Demand. However, can prices ever become unfairly burdensome? In times of crisis is it truly moral to charge sixty percent more over the stand retail price? Conventional wisdom would dictate such pricing practices are considered opportunistic, regardless of any deficits or constraints presently imposed on the supply chain for essential goods.
The common consensus of pricing gouging extends beyond the opinions of the average consumer. Perceiving price gouging as a byproduct of entrepreneurial avarice is an opinion held by lawmakers and other elected officials. Arizona is one of the few states to not have price gouging laws. Some may see the absence of such statues as gross negligence from a consumer protection standpoint. One should consider that Arizona rarely is subjected to the varieties of natural disasters that put extreme strain on supply lines. Thankfully, the Grand Canyon state seems to side-step hurricanes and tornadoes, just one of the advantages of living in a mountainous and landlocked state.
Despite the multitude of reasons why Arizona does not presently have price gouging laws, this should remain the case! Price gouging laws are based upon a litany of misconceptions and anti-market bias. Almost all arguments against pricing gouging ignore the purpose and function of prices, making price gouging legislation a codified form of economic illiteracy. Price gouging laws may be just another form of price controls, an arbitrarily devised price ceiling. The fact that price gouging laws are arbitrary can be inferred by the lack of consistency of price gouging laws throughout the country. Some states do not even quantify the defining characteristics of price gouging, making enforcement completely discretionary.
The act of price gouging serves several advantageous functions within the economy. It operates as a safeguard against hoarding, and the higher revenues yielded from price gouging provides differential compensation to business owners and employees. This is imperative in circumstances such as a natural disaster where the risks of providing products and services are much greater. The larger margins provided by price-gouging directs producers towards manufacturing and harvesting essential items, illustrating the inherent fallacy in the support of price gouging prevention laws.
Price Gouging Discourages Hoarding
Even in the nascent period of the state-mandated shelter-in-place orders, consumers just about cleared the shelves of toilet paper. Toilet paper is a shelf-stable product that is relatively low in cost, making an ideal item for hoarding.
Unfortunately, it is now conspicuously absent from store shelves. The means of obtaining any is waiting two weeks for your Amazon order to come in.
The means by which price gouging operates as a deterrent from an item being hoarded is simple. If the price is higher people will be less apt to purchase excessive amounts of the commodity. This function becomes more important as inventory for essential items starts to dwindle. A severe spike in the prices for toilet paper would be congruent with the Law of Supply and Demand. The more stress that is put on the supply of toilet paper, the higher the price will be. It is also important to remember that prices operate as a signal in the marketplace. Low prices signal to consumers to buy. High prices are a sign to vendors to sell. If prices are distorted by price gouging laws, it will impact the supply of toilet paper. Consumers will be encouraged by the artificially low prices to buy more, invariably leading to supply shortages. This demonstrates how “price-gouging” assists in regulating the supply of an extremely scarce resource.
Compensating Differentials to the Vendors
Public perception is that significantly increasing prices on essential goods in times of emergency is “unfair”. Conversely, it is worth asking whether it is fair for a vendor to continue to provide a service at great risk and to expect the same amount of compensation? Even disregarding the wellbeing of business owners, what about their employees? Should they be expected to continue to work for the same amount of pay, especially when they face the potential of contracting a disease such as COVID-19? Prices fluctuate with market demand. In instances where there is bodily harm for providing the same goods and services, it is reasonable to expect to pay more. Through braving such dangers, I believe a compensating differential is justifiable. This additional compensation is essential for offsetting undesirable aspects of a specific job, such as bodily harm.
Vendors and their employees also take on other risks as well. In the instance of a natural disaster, there are additional logistical considerations, such as damaged infrastructure and lack of utilities (electricity, running water, etc.). Beyond that, vendors also take on legal risks, such as potential fines for violating shelter-in-place orders. Keeping these considerations in mind, higher prices may be necessary to incentivize vendors to continue to operate.
Price Gouging Guides Production
One of the more surprising effects of the COVID-19 pandemic has been seeing producers shift production. Most notably, craft distilleries have diverted resources to the production to making hand sanitizer instead of vodka. Even the world’s largest whiskey producer, Jack Daniels, is getting in on the action. What should demystify our confusion as to why this is happening is if we remember that prices are market signals. Substantially higher prices of hand sanitizer due to the increase in demand will shift production efforts away from producing liquor. Higher prices are a hint to producers of potentially higher profits thereby creating incentives to produce the essential items that are in short supply rather than luxury goods like pricey craft whiskey.
Market prices are the explicit quantification of information, hence why price gouging guards against hoarding. In a Hayekian sense, we are contending with imperfect market information. The high prices convey the toll that overall demand has taken on the supply. Prices operate as a signaling mechanism to show how resources are to be best allocated. Government intervening on moral grounds can only cause more issues. The asymmetry in market information makes it impossible for a top-down solution to make pricing more equitable.
Despite the conventional view of price gouging, it does play a vital role in managing the supply of essential goods in times of emergency. It stifles hoarding, provides just compensation to vendors for assuming the risk and other logistical hardships in crisis conditions and it operates as a signaling model for resource allocation. Spirited repudiations of the practice are well-intentioned but misguided. No one likes to feel ripped off. No one likes to see people who are disadvantaged suffer. However, there are justifiable reasons for the sharp increase in prices.
Featured Image Credit: By Unknown author – http://chroniclingamerica.loc.gov/lccn/sn88085187/1904-05-02/ed-1/seq-3/ (The Tacoma Times), Public Domain, https://commons.wikimedia.org/w/index.php?curid=42548107
Peter Clark is a concerned Arizona resident with a strong interest in pro-market political economy. He has worked in logistics and presently works in the technology industry.