Defending price gouging is about as popular as the proverbial fart in church. In times of crisis, people love to righteously rail against “price gougers” as the low of the low, the scum of the earth. Since we’ve all been trained since grade school to emote about economics instead of think it carefully through, it’s a popular take. But not only does this not help anyone, it actually hurts. So here we go, in defense of “price gouging” (which btw isn’t even a valid economic concept, it has no objective definition).
-Anytime you have a sudden huge increase in demand, like for toilet paper or hand sanitizer recently, the price must rise to reflect that. If it doesn’t, there will be shortages and empty shelves. We can whine on social media all we want, but this will ALWAYS happen if prices aren’t allowed to rise. Which they aren’t allowed to, because we have “price gouging” laws and social media scolds which will severely punish retailers who raise prices above some arbitrary metric.
-The reason for the inevitability of hoarding and empty shelves is because the market value of the toilet paper or hand gel is suddenly far higher than what it’s being sold for. Thus, there’s no penalty for hoarding and over supplying, because even if the hoarding isn’t ultimately needed, no one has overpaid for the product, and can just use the toilet paper in the future. So you have a prisoner’s dilemma-type situation. Everyone can scoff at each other for hoarding and say it’s unethical, but the first person who hoards benefits tremendously by buying goods at way under market value. So it’s an untenable position which will ALWAYS break down. It’s as inevitable as the incoming tide.
-What “price gouging” does is to raise the cost of the good to the market clearing price, which is critical because it lets everyone know what the actual value of the good is, and sends the proper price signal to consumers and producers. With higher prices, if you hoard you are paying a huge penalty for doing so and taking a huge risk, because if prices drop in the future you’ll be a giant loser. Few will stock up on gallons of hand sanitizer or pallets of TP if it costs them a fortune. Additionally, it sends a signal to conserve those valuable resources and shift behavior if possible. Most of us shift our behavior to not eat lobster often, because it’s expensive. If lobster was offered as cheap as chicken, it would be unavailable every time you went to the store. Today, TP is the new lobster!
-The other benefit to price gouging is to give producers a huge incentive to produce more. Ramping up hand sanitizer gel production is now much more lucrative than producing hair gel, for instance. Allowing prices to function allows the market to allocate resources to their most productive use, which is what we want, particularly in dire situations. We want producers to up the supply and drive the price back down. If no price signal is given, there’s little incentive to do so.
-Whining about and prohibiting price gouging does two things; it guarantees shortages and hoarding, and lessens the incentive for producers and retailers to bring more product to the market. What it DOES do is make one feel self righteous, which social media now brings in spades. While it’s all fun and memes with toilet paper, it won’t be so much fun with food or medical supplies. Then, our righteousness and ignorance of economics will become dangerous and deadly. For illustration, see price controls in Venezuela.
-What this guy did with hand sanitizer, is basically take advantage of the fact that we have price gouging laws and knowing retailers can’t raise prices. If retailers were allowed to raise their prices in anticipation of demand, his scheme would be extremely risky and costly to accumulate this amount of product relative to the potential reward. But since he could buy them at the normal price, it became much more lucrative. Just like the drug trade, there’s no way to stop lucrative businesses, no matter how many you shame or put in jail. This guy got put in social outcast jail, but like with the drug trade, there’s an endless supply of people willing to take the risk. It’s whack-a-mole, and a fool’s errand to stop the inevitable black or gray market that arises from wanted goods that are unavailable.
-Also, this is essentially what commodity traders do every day. They risk capital in hopes of profiting off predicting the future market. While they don’t have the price gouging laws to make it more lucrative like this guy, commodity speculation is what ensures us a steady supply of goods. If there’s a huge natural disaster or world event, we still seldom see a global shortage of goods like corn, wheat, oil, etc. That’s because speculators are constantly adjusting prices to the clearing level in the commodities market, which ensures goods will always be provided.
