Why We Need Price Gouging: Benefits of Raising Prices During Crisis
By Dr. Scott Duryea, Associate Professor, School of Security and Global Studies, American Military University
We are out of toilet paper!
Not only toilet paper, but milk, eggs, bread, bottled water, frozen vegetables, meat. Run down to your local grocery store and chances are you’ll encounter the same scenario.
In this coronavirus-panicked situation, Walmart and Costco become like the Tragedy of the Commons, where the early bird gets the worm (in this case, the 64 rolls of toilet paper) and succeeding customers have to buy paper towels instead.
Even if your family is prone to calm and collected behavior in times of stress, it’s likely you still joined the frenzy by stocking your freezer with a few weeks’ worth of food. If not, you might be out of luck when you actually run low on food and supplies in the coming weeks.
What Contributes to Supply Shortages?
In times of panic, demand for nonperishable items spikes while supply on the shelves remains the same in the short term. In ordinary market conditions, prices serve a coordinating function that reflects how much people want a particular item compared with how many people want it.
When prices are too high, items sit on the shelves as consumers look elsewhere for cheaper alternatives. When prices are too low, goods fly off the shelves and shortages result.
Because prices serve this social coordinating function, they reflect the “fair” price given the context of local supply and demand.
In times of crisis, stores are often prevented – legally or by social stigma – from raising prices temporarily to meet heightened demand. By not raising prices, essential supplies often are bought up quickly leading to shortages of those essentials.
Stores that do engage in price modification are often accused of “price gouging,” which is seen as taking advantage of the public in times of crisis. However, regardless of the intentions of the store owner, a sudden increase in prices actually produce numerous social goods.
- Natural Rationing: Raising prices on essential goods result in a rationing process where individuals only buy what is absolutely necessary to meet their needs. As a result, they will leave those now-expensive items for others who truly need them. This happens because increased prices force people to determine how badly they actually need those supplies. Without a rise in prices, the first buyer can simply hoard cases of bottled water at a relatively minimal cost, depriving others of that water. Higher prices keep people from buying things they don’t really need and force them to only buy the amounts of things they do need.
- Suppliers are Incentivized to Sell Needed Goods. Higher prices send a signal to others who are in possession of goods in short supply to place those items on the market. For example, a rise in the price of toilet paper creates a profit-making opportunity for suppliers with toilet paper to sell it where they can get a higher price. It also tells those people who accidentally ordered 48 boxes of toilet paper (instead of the intended 48 rolls) to place those boxes back on Amazon or Craigslist for people who need them.
- Stymies Panic. Allowing prices to adjust to demand and so-called “price gouging” contributes to a reduction in panic by helping ensure that needed goods will remain available in stores as people need them as the crisis endures. I’m currently sitting at my computer wondering if Walmart will have eggs when I go back tomorrow. Things are so bad that people actually paid the $6 dollars for a dozen organic eggs. All that tells me is that $6 is still too low for a dozen eggs compared to the demand for them.
I don’t like paying higher prices for ordinary items either. Like many people, I have a monthly budget for everything I buy. Higher prices frustrate me, but what frustrates me even more is when the items I need are not available because people are buying large quantities of them that they do not need to meet their current situation. Consequently, they deprive others of the items they do need.
If simply raising the prices of certain goods produces these beneficial effects, why don’t we see it occur? Government intervention into the economy.
Most states have laws on the books that prevent price gouging. In West Virginia, my home state, the law prohibits “selling consumer food items, medical supplies, heating oil, building supplies, etc. at more than 10 percent of the average cost of those items prior to [an emergency] declaration.”
Violating this law is a misdemeanor fine of up to $1,000 and/or a year in prison.
Such government edicts don’t just suddenly change the laws of economics that spring from the reality that goods are scarce. Where market prices rise above the government-mandated price ceiling, shortages always result.
When governments set price ceilings, especially in sensitive times, people can’t get what they need, prices don’t inform would-be entrepreneurs about opportunities, and the bad policy fuels further panic.
These laws are an outgrowth of society’s ignorance regarding the role of prices in the market. People view “price gougers” as needlessly taking advantage of hapless victims during times of great stress. Instead of market signals, blanket public service announcements must tell the public to stop hoarding face masks so there are enough for medical professionals and those who are sick and actually need them.
Even where such price gouging laws are absent, we still see some stores refraining from increasing prices to avoid the social stigma. Instead of raising prices, they will institute their own rationing measures of, say, two packages of bread per person. But nothing is stopping that person from sending her son and her daughter and her husband to the store to get another two items each to get around the store’s restrictions.
There’s no replacing the allocative process of prices. They tend to accurately reflect supply and demand conditions in local areas. Allow prices to adjust and get government out of the way of the “invisible hand” of the market.
About the Author: Scott Duryea, Ph.D., is an Associate Professor of Security and Global Studies at American Military University, teaching courses in international relations, security studies, and research methods. He holds a doctoral degree in international studies from Old Dominion University. To contact the author, send an email to IPSauthor@apus.edu. For more articles featuring insight from industry experts, subscribe to In Public Safety’s bi-monthly newsletter.
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