The Benefits of “Price Gouging”

By: Connor Mortell

With the recent lack of availability in gasoline, Joe Biden came out with a clear message against price gouging stating:

I also want to say something to the gas stations: do not, I repeat, do not try to take advantage of consumers during this time. I’m going to work with governors of the effected states to put a stop to price gouging wherever it arises. And I’m asking our federal agencies to stand ready to provide assistance to state level efforts to monitor and any price gouging at the pump. Nobody should be using this situation for financial gain.

In Human Action, Ludwig von Mises left us with the perfect response to this:

Economics does not say that isolated government interference with the prices of only one commodity or a few commodities is unfair, bad, or unfeasible. It says that such interference produces results contrary to its purpose, that it makes conditions worse, not better, from the point of view of the government and those backing its interference.

This has been explained by some of the most simple and well known economics that have been explored in the link above by Mises, as well as by almost all other economists. The price system operates largely in response to supply and demand. As supply and/or demand shifts, the price shifts in response. In a natural market this current gas crisis would be resolved by allowing the price to the market forces at play. A pizza delivery guy may be willing to pay more to access gas as his particular conditions lead him to more highly value it immediately and will chose to take the hit in exchange for continued payment at his job. A job that has nothing to do with driving, however, will give that individual the option to potentially wait to get gas for a week or so while the supply builds up because that individual would find the cost of walking to work for a few days less in their own subjective value than the price of gas for the moment. As well, this would deter panic buying as the heightened price would ward off those buying more gas than they deem they need. Lastly, a free flowing price would lead to higher prices in states where it is needed most, encouraging suppliers to sell gas their more urgently, thus resolving the problem faster. However, in a world where we prevent price gouging, we see the results that we are seeing now: shortages.

The economics of this are fairly simple, however, the politics of price gouging get a little more murky. Even among those who agree with all of what I’ve set out already, it is not uncommon to see proponents of anti-price gouging laws. This is because the majority of instances in which price gouging enters into the conversation are in response to some kind of emergency. It is very rare that someone is concerned about the newest pair of shoes on the market being price gouged because they aren’t considered necessities. Whereas when hurricane season starts – or even more urgent, when a hurricane is actively detected on its way in – and prices start to rise sharply for water and batteries, the average individual is much more concerned that people will find themselves without necessities during an emergency. While the economics still hold and that option is still preferable to shortages, there is some political capital in convincing the people that you’re advocating for their ability to have low priced goods when they need them most. In addition to the economic principles listed above, this argument can be easily dismantled by taking it to its logical conclusion: if lower priced goods during an emergency are both preferable and possible, why stop at a dollar per water bottle or batteries? Why not drop to 50 cents? A quarter? Free? And if free is possible – why stop during an emergency? Why not provide that same thing all the time? Inevitably the logic of price controls has to break.

However, this particular situation leaves free market economists with a window of opportunity on which we should capitalize: this is not an emergency. Don’t get me wrong, this is in fact a very serious problem. However, houses are not collapsing, people are not starving en masse, rioting is not taking over. While it is the result of nonnormal circumstances, the effect on a day to day citizens is not much different from just a failure in supply chain. As a result now would be the perfect opportunity to finally demonstrate the benefits of the price system without the risk that would be inherent in an emergency situation. While I’d advocate for freedom in the price system under all circumstances, the standard claims against it are completely absent during this event. There has never been a better time to normalize so called price gouging. 

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