With the coronavirus pandemic upon us, and the topic of 24/7 media coverage, attention has been given to so-called “price gouging.” Webster’s dictionary defines the term simply as “charging customers too much money.” In the context of the current coronavirus panic, the term most commonly is used to describe people buying supplies such as hand sanitizer or toilet paper and selling them at a much higher price.
The individuals who participate in this practice have been vilified as greedy and selfish by the media. Now law enforcement agencies are even cracking down on them. In Michigan, Attorney General Dana Nessel issued a cease and desist to an individual in Hillsdale who was reportedly selling face masks on eBay for higher prices. The criticisms of this practice come from people of all political stripes, and I want to shine some light that I hope will put this rhetoric to rest.
While politicians think that by creating price control laws they are looking out for our best interest, that couldn’t be further from the truth. This lesson should have been learned from gas shortages in the 1970s. Look what happened then. The artificially low gas prices ensured that limited supplies were depleted too quickly, leading to long lines and inability to get gasoline. As author of Basic Economics, Thomas Sowell, has pointed out “price controls turned a minor adjustment into a major shortage.”
The law of supply and demand tells us how a resource shortage can be avoided. When a crisis occurs, increased demand for certain resources occurs. At the present, this happens to be: hand sanitizer, face masks, and of course, toilet paper, among other things. This higher demand causes the market price for these respective goods to rise. Without allowing the price of these goods to increase to their market value, there will be massive shortages, such as with the gas example previously mentioned.
The beauty of allowing the free market to work, is that increased prices act as a market signal to suppliers. Incentivized by profit, suppliers know they need to supply more goods to meet consumer demands. This allows enough goods to be created to fill the demand—so that the shelves aren’t empty next time you walk into the grocery store to stock up.
On a similar note, supply and demand law shows us how resources are allocated effectively when unfettered from government controls. Proponents of price gouging laws claim that these increased prices “are unfair” to consumers. The truth of the matter is, allowing prices to be freely set is the most fair method of getting resources to where they are needed most.
Higher prices mean unnecessary, and excessive “just in case” purchases are discouraged. This is because people who are more in need will value the resource more than someone who is not. An example of this is with a generator, a person who needs one for health-related reasons will likely pay more for one than someone who just wants one to play Xbox.
As you might have realized in the beginning of this writing, what exactly constitutes “price gouging” is hard to define, as there is no common meaning. This raises an issue when it comes to anti-gouging laws. Michigan, for example, defines price gouging as “grossly in excess of the price at which similar property or services are sold.” You would think they would make it more clear how high is “too high” considering the penalty is up to $25,000 per violation.
The main reason “price gouging” is so hard to define is because most economists don’t consider it a real term, since prices are set by the price consumers are willing to pay. If anything, the term is used to reflect an emotional response non-economists use to describe rapid price increases.
Politicians love to grandstand and act like they “are doing something” whenever there’s a crisis to gain political clout. In reality, this practice is self-serving and only benefits those making the laws. If the government really wanted to help with the crisis at hand, they would get the hell out of the way and let the market work—which we need in times like this more than ever.
While even those well meaning may think anti-gouging laws are a good thing, the humane thing to do is actually allow goods to be supplied to meet market demand and be allocated accordingly. The fact is that politicians and your facebook friends are wrong about price gouging.
As the great economist Milton Friedman once said, “the gouger deserves a medal.”
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The featured image is courtesy of Pixabay.