From Natural Disasters to the Coronavirus: Why Price Gouging Laws Hurt the Most Vulnerable

Release Date
April 28, 2021

Topic

Debt and Spending Economics Free Markets and Capitalism
Description

As a result of the COVID-19 pandemic, there’s been a strong effort to curtail price gouging on items such as hand sanitizer and medical face masks.

What doesn’t get said enough, however, is that forcibly restricting prices from rising above a certain threshold will not in itself influence the market conditions that drive prices up.

Price gouging encourages competition by pressuring manufacturers and distributors to increase production, which over time, would actually drive down costs. Price controls during a time of crisis, however, do nothing to address the shortage problem.

JOIN our PATREON page and help us explore the ideas of a free society. You will get access to exclusive videos, polls, Q&A’s, behind-the-scenes, Learn Liberty merch and so much more. Sign up on https://www.patreon.com/learnliberty/ As a result of the COVID-19 pandemic, there’s been a strong effort to curtail price gouging on items such as hand sanitizer and medical face masks. What doesn’t get said enough, however, is that forcibly restricting prices from rising above a certain threshold will not in itself influence the market conditions that drive prices up. Price gouging encourages competition by pressuring manufacturers and distributors to increase production, which over time, would actually drive down costs. Price controls during a time of crisis, however, do nothing to address the shortage problem. SUBSCRIBE: http://bit.ly/32HUbvt TRANSCRIPT SNIPPETS: Is asking $1300 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 $1300. 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 for the $1300 you gave up for it. Scond, 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 sellers’ 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 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 a hurricane for $800, and resold later for $1300, 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 $1300 for a generator benefits from a system in which sellers are allowed to charge that price. That’s because the profit motive that that 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 distributed 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 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 and supply to go down, with the result that there isn’t enough stuff to go around. Anti-gouging laws don’t do anything to address this underlying shortage. In fact, they make it worse by destroying incentives for conservation and increasing 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.