From hurricanes, to wildfires, to floods, communities have been negatively affected with shortages in essential goods. This of course comes on the heels of the COVID pandemic where major supply chain effects cleared store shelves of many goods. In these situations, it’s not been uncommon for prices to escalate on these goods in limited supply. Bottled water, toilet paper, and basic food staples, as well as fuel prices, can climb drastically. In the wake of these events, as well as alongside inflationary trends, some are calling for price gouging prevention laws. This assumes that shops and stores greedily raise prices in an opportunist manner during times of stress. Certainly, shortages and price increases occur, but rarely is this a result of price gouging due to greed.
While some economists may support price gouging prevention laws, the vast majority appreciate their lack of effectiveness. In fact, such laws that seek to prevent price gouging due to greed actually make shortages worse. And they may even negatively affect the very people that such laws look to protect. In order to understand why pursuing anti-price gouging laws lack merit, it’s worth examining market dynamics more closely. Only then can one appreciate how government oversight of market prices is a move in the wrong direction. There’s no question that price gouging due to greed is wrong. But letting the market punish such bad players is a far more effective strategy that price gouging prevention laws.
The Impact of Anti-Price Gouging Laws
In theory, implementing price gouging prevention laws should protect consumers from being charged excessive amounts. In fact, many states have such laws already in place. In times of emergencies or disasters, several states have laws that go into effect to prevent price gouging due to greed. But these statues falsely place a ceiling on prices that constrain natural supply and demand pressures. For example, suppose a case of bottled water cannot be sold for more than $10 in the aftermath of a major flood per statutes. However, based on a tremendous increase in demand, perhaps due to contaminated city water, a market-based price would be closer to $20. In such instances, the demand won’t be affected. However, the incentive to acquire additional supplies will be. Thus, shortages are likely to be perpetuated by the anti-price gouging laws.
It’s important to recognize that consumers of goods aren’t the only ones affected by disasters and similar events. Shop owners also face risks related to these disasters, which drive up their costs as well. In addition, when demand for fuel or bottled water escalate tremendously, the only option to ration supplies is based on price. Likewise, higher prices encourage shop owners to pay extra to get these goods from elsewhere quickly. This might mean getting supplies from out of state, paying for overtime labor, or competing for short supplies at higher costs. Each of these things cost shop owners, and the pricing strategies they charge support these efforts. But if price gouging prevention laws prevent natural price increases from occurring, these incentives disappear. And as a result, supply does not increase, demand stays the same, and many suffer without these goods.
The Market’s Power of Self-Correction
Understanding that price gouging prevention laws can have undesirable outcomes, it’s also worth examining market-based solutions. Assume for a moment that such laws weren’t in place. Disaster-related demand for a good occurs, and suddenly, shop owners find their supplies rapidly depleted. If they keep the item at the same price or even a price slightly higher, customers are certain to hoard as much as they can. However, by raising the price, they discourage such behavior, leaving more of the good for others. At the same time, since demand supports a much higher price, the initial profits gained can be used to invest in more of the good. Even though it will be more costly to obtain the item in the current situation, the higher price allows shop owners to do that. As a result, this will enable the supply to increase proportionate to the demand.
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It’s also worth noting that markets naturally discourage price gouging due to greed. Suppose a shop owner was acting out of greed and chose to charge twice what supply and demand dictated. Assuming other shop owners were in the same market, competition would quickly drive customers away. The shop owner that most accurately targeted a market-drive price would be the one to excel. Those charging more would lose customers, while those charging less would soon run out of supplies. This is how competitive markets work, and it’s also why price gouging prevention laws simply aren’t needed. In order to create a situation where supply incentives can address sharp changes in demand, market -based answers will be the best.
A Call for Common Sense to Prevail
The motivations behind many price gouging prevention laws have good intentions. The goal assumedly is to better ensure consumers have access to necessities during times of stress and emergency. By forcing prices to stay below a certain limit, they believe this will protect everyone, including those most vulnerable. But in the process, they undermine natural market solutions that could fix the problem. They add insult to injury by discouraging shop owners from pursuing these solutions. And they promote hoarding of scarce goods by those who have more financial resources. It’s clear that these laws do nothing to help consumers during these situations. They also falsely assume suppliers are price gouging due to greed, which is a rare occurrence.
Instead of adopting price gouging prevention laws, the better approach involves providing supports for consumers. Helping shop owners better meet demand can help lower costs and therefore the price of goods. Facilitating supply chains and incentivizing production can do the same. These are strategies that enable market forces to more readily resolve the situation. Rather than assuming shop owners are price gouging due to greed, a more positive perspective about pricing strategies should be taken. They raise prices to accommodate their own increased expenses in most instances. This is why price gouging prevention laws are not only ineffective overall but likewise detrimental to commerce in general.
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