Learn Liberty

Is Price Gouging Immoral? Should It Be Illegal?

Price gouging is usually defined as raising prices on certain kinds of goods to an unfair or excessively high level during an emergency. Although price gouging is illegal in 34 states, economics professor Matt Zwolinski asks whether price gouging should be illegal. He uses an example to examine the moral status of price gouging.

The following points suggest that price gouging may not be immoral after all:

  • Consumers do not have to buy products for the higher price. If they decide to pay, it is likely because they are getting more from the product than they’re paying.
  • If the prices for important goods do not go up, it is likely that scarce resources will not be available for those who need them most.
  • For buyers, high prices reduce demand and encourage conservation. People who may need something more are likely to pay more. For sellers, being able to charge higher prices creates a profit incentive to encourage more sellers to bring products to the market.
  • The profit motive will increase competition and eventually drive down the price.

What alternative institutions would do better? When price gouging is prohibited goods go to whoever shows up first. Even if we assume that price gouging is immoral, it almost certainly should not be illegal. The only reason price gouging occurs is because demand is high and supply is low. Professor Zwolinski argues that even if you think that price gouging is morally wrong, making it illegal doesn’t make sense. It hurts the very people who need our help most.

Is Price Gouging Immoral? Should It Be Illegal?

A hurricane hits your town and the power is out. Your child is diabetic, and you need power to keep her insulin refrigerated. You’re desperate, but perhaps you’re in luck. I have an electrical generator that I’m willing to sell you, and you have the $800 that generators like mine typically cost. The only problem is I don’t want to sell it to you for $800—I want $1,300. Now, as it turns out, my offer would be illegal in the majority of U.S. states, about 34 of which have statutes that prohibit price gouging. That practice is usually defined as raising prices on certain kinds of goods to an unfair or excessively high level during an emergency. So there’s really no question about what the law would do to me if I made an offer like this to you.

But even if the law is clear, the moral status of price gouging is not. Is price gouging always immoral? And whether it is or not, should it be illegal? Let’s look at the question of morality first. Is asking $1,300 for the generator morally wrong? Of course, you’d rather buy it from me for $800, but there are three reasons why my charging a higher price isn’t obviously wrong. First, remember, you don’t have to buy it from me for $1,300. If that’s more than you think the generator is worth, you’re free to walk on by. If you do decide to pay, it’s because you believe you’re getting more value out of the generator than you do from the $1,300 you gave up for it. In other words, you’re coming away from the deal with more than you gave up. The second: ask yourself what would happen if I did charge only $800 for the generator. Remember, you aren’t the only person who needs electric power in this situation. If the price was lower, would the generator still have been there when you tried to buy it, or would someone else have snatched it up before you ever had a chance?

This leads directly to the third point, which is that high prices do more than just line seller’s pockets. They also affect how buyers and sellers behave. For buyers, high prices reduce demand and encourage conservation. They lead buyers to ask themselves whether they really need that generator or hotel room or whether they can do without. And by doing so, they allow at least some of those resources to be conserved for other people who might need them more and therefore are willing to pay more. And for sellers, high prices encourage people to bring more goods to where they’re needed. If generators can be bought in an area not affected by the hurricane for $800 and resold later for $1,300, that creates a profit incentive for people to bring generators from where they’re less needed to where they’re more needed to get them to where they’ll do more good for people who need them most.

All of this leads to a surprising conclusion. Even someone who can’t afford to pay $1,300 for a generator benefits from a system in which sellers are allowed to charge that price. That’s because the profit motive the debt system creates encourages competition, which increases supply and ultimately drives down prices to a more affordable level for everyone. Now, it’s true that when price gouging is legal, some people won’t be able to afford the higher prices that result. But ask yourself, what alternative institutions would do better? When price gouging is prohibited, goods usually go to whoever shows up first. If you care about distributive justice, is that really a better system?

I think there are good reasons to doubt that price gouging is immoral. But suppose you’re not convinced. Suppose you think price gouging is exploitative and wrong. Should it be illegal? The answer, even if we assume that price gouging is immoral is almost certainly that it should not be illegal. If price gouging is wrong, it’s because it hurts people in vulnerable situations. But then, the last thing you want to do is hurt those vulnerable people even more. Remember, the only reason price gouging occurs is because a disaster causes demand for certain goods to go up or supply to go down with the result that there isn’t enough stuff to go around.

Antigouging laws don’t do anything to address this underlying shortage. In fact, they make it worse by destroying incentives for conservation and increased supply. So even if you think that price gouging is morally wrong and that merchants should refuse to engage in it, making it illegal doesn’t make sense. It hurts the very people who need our help most.

Right-click the link below and select "Save Link" or "Save Target."


Download Video

Right-click the link below and select "Save Link" or "Save Target."


Download MP3
    LearnLiberty_Banner (1)