When the price of something rises, allegations of price gouging inevitably surface. Vice President Harris claims that she will “make groceries more affordable by cracking down on price gouging on food.” What exactly is price gouging and what should be done about it? Simply put, price gouging is a meaningless concept and fighting it makes the situation worse.
The price of something rises for two reasons: disrupted production or increased demand. Prices often spike during a natural disaster when both simultaneously occur. The rising price ensures that supply equals demand, which means that there is no shortage of the good. The good is available – it is just expensive.
The alternative is to label such a price increase as “price gouging” and hold the price at the pre-natural disaster price. The result of surging demand and disrupted supply without a change in price will be a shortage of the good. The good will be unavailable, including to people who greatly need it.
Consider toilet paper during the early months of COVID-19. For various reasons, the demand for toilet paper surged while production was disrupted (as was the production of many goods and services during that time). To avoid being labeled as “price gougers,” grocery stores kept the price of toilet paper at the pre-pandemic price. The result was a months-long shortage of toilet paper. For people who didn’t have extra rolls stored in the basement, this posed a significant problem.
Calling sellers “price-gougers” when the price rises is like blaming a thermometer for a heat-wave.
What if grocery stores, instead, would have raised the price of toilet paper to, say, $100 a pack? Only someone in desperate need would be willing to pay this price. There would not have been people panic-buying hoards of toilet paper only to store it in their basement or garage, which is a huge waste when toilet paper is in short supply. Thus, such a high price discourages hoarding and ensures the good is available. When the price rises, you choose whether or not you purchase the good. When the price is held artificially low due to price gouging laws that result in a shortage, that choice is made for you.
Letting the price rise to clear the market ensures that a good remains available and gets channeled to those who need it the most, since they are the ones willing to pay the higher price for it. Someone with a couple of extra packs of toilet paper in the basement obviously would not be willing to pay $100 for an additional pack. Someone down to their last roll might be willing to!
Calling sellers “price-gougers” when the price rises is like blaming a thermometer for a heatwave. Price-gouging laws are akin to trying to break the heatwave by breaking thermometers. Higher prices are always the result of some external event – such as COVID-19 and the massive increase in the money supply that was cheered on by both parties, resulting in forty-year high inflation. Price-gouging is not to blame.
