This post is inspired by actual events...
What is "price gouging?" For some, it is simply defined as charging a price significantly higher than normal. But I take it that as the words are used most often in the media and by economists, price gouging is the raising of a price of a commodity or service significantly higher during times of crisis or a natural disaster than it would be otherwise. This is what I shall mean by "price gouging."
People don't like price gouging. A spike in gasoline prices in Louisiana due to a natural disaster is unseemly. It offends people. It's unfair. "Big Oil" is being greedy and not caring about anyone other than Big Oil. They aren't looking out for the little guy.
Laws against price gouging in the U.S. are a relatively recent phenomenon, but one can understand why so many states have passed laws against price gouging: their constituents think that price gouging is unjust or unfair, and it's in the interests of legislators to please their constituents.
My first semester at OBU, my county made news due to accusations of price gouging. According to the Democrat-Gazette:
AAA reported that a regular gallon of gasoline averaged $3.586 per gallon at midnight Thursday in Arkansas, up one cent from Wednesday.
In Arkadelphia, Prosecuting Attorney Blake Batson said he sent subpoenas Friday morning to several Clark County stations along Interstate 30, requesting information about prices being raised overnight from $3.68 to $4.19 a gallon.
State law 4-88-303 prohibits the raising of prices more than 10 percent of that charged immediately before an emergency proclamation unless the increase is merely "attributable to additional costs."
So what's the deal? What's wrong with raising prices on a gallon of gasoline by $.50 from one day to the next? I'm not an economist, but I'll do my best to defend the practice of price gouging (at least in most circumstances) since I can see no good reason to prohibit it. Even though "price gouging" is a pejorative phrase (it brings to mind ice picks and eyeballs) I shall use it in a neutral sense. I welcome comments and objections.
Let's just start with the example at hand.
I raise the following questions for those in favor of laws against price gouging: (1) What is the justification for prohibiting businesses from the raising of prices more than 10 percent (on pain of fines and ultimately imprisonment) for their own goods/services unless the increase is merely attributable to additional costs? Why is the attribution of additional costs the only justified reason or cause for an increase in price? Why 10 percent rather than 20 percent or 5 percent? (2) Why favor consumer interests over merchant interests? Why take sides and pick winners and losers? Why is this a good policy? What's the argument?
I can think of several reasons why price gouging--in times of crisis or disaster let alone during other times--makes good sense and doesn't appear unjust. But instead of listing them all in a boring outline, I'll put the argument in the form of a concrete story.
Suppose I am the owner of Ma and Pa's Convenience Store. Among other things I sell bottled water and canned foods.
A hurricane is impending. The law says that I can't raise prices more than 10%. What unfolds?
Likely what will happen is a rush on my store, my goods--the ones most relevant to the hurricane--are quickly bought at or close to the normal price, and I quickly run out of them. The first groups of people who arrive buy up most of my goods, probably purchasing far more than they need because the price is about the same as it normally would be and, well, "better safe than sorry."
Now, knowing that I will likely be bought out of most of my goods, I may instead decide not to show up for work and to close the store (there is a disaster afoot) instead of paying my employees to hang around at the store which for many of the hours will be out of stock of most of the things that my customers will want to buy during the crisis. Sure, I will sell a lot in a relatively short amount of time, but I will probably not be resupplied for quite a while if the hurricane hits, and I will likely make less than I would have over the next few days due to having a half-empty store. (No one will likely be buying my CD's, and my magazines will soon be outdated due to a disruption in the supply line).
Or instead, I could raise prices. If I could raise prices--the natural thing to do when there is a lot of demand and little supply--I would have plenty of motivation to get to the store, stay open, and gainfully employ my employees. Moreover, the supply would last longer. Initial buyers would purchase the bare minimum, leaving more for others in the hours and days to come. In addition, stores in neighboring towns would be motivated to get me more supplies, since they also stand to make a decent profit, charging me more for the items for the trouble of this abnormal resupplying. (And is there anything wrong with making a profit or wanting to make a profit? Surely not. What would the reason be why it is wrong?)
But I can't do that. If I do, I'll face a $50,000 fine, and I'm a small business and can't afford the hit. But even without the fine, I know people are narcissistic, and I know they have been fed over and over that it's okay to want a free lunch and to expect handouts from their government and everyone it lords over. If I raise prices--law or no law--people might think poorly of my business. They will think that they have a right to my stuff at a low cost. They will be angry with me for not charging them the price that they think the goods are truly worth (in Platonic Commodity Heaven). It won't be good for business if they perceive that I'm trying to stick it to them, and like them, I'm only interested in money and myself (obviously, since I own a business and don't work for the good government--all I care about is my greedy self). I also know that Walmart will have a much easier time resupplying its stock than I will; in addition, the local store will be able to cover its losses much more easily than I will due to inclusion in the massive, corporate entity which is Walmart; thus the local Walmart will likely keep its prices relatively low.
I am now in a bit of bind. If I show up for work, I will pay my employees, run out of goods quickly, will not make much money, will likely lose money in the long run, will get fined if I charge <10% more, and I risk getting caught in a hurricane. Better, I think, not to open up shop and ride it out. I decide to tell my employees not to show up to work until after the hurricane clean-up. Hopefully, they too can ride it out.
Should the government force me to be open? Should it force me to go to work and sell goods at prices with a relatively fixed rate? After all, I have goods which people might want or need during an emergency. But surely the government should not be in the business of forced labor. But if that's right (and it is!...unless we're talking WWII!), why should I not be allowed to raise the prices at my store to whatever price I see fit? After all, I've worked hard to build up my business and I do own the goods at my store. Why should I stop at a 10% hike when I know people are willing to pay more and know that the first people who come will buy up all of my goods leaving little for others who might need them?
In short, it seems to me that anti-price gouging laws
(a) will be extremely arbitrary, thus rendering markets less rational
(b) will have the result of hurting small businesses
(c) unjustifiably discriminate against the employees of the merchants (at least in practice, if not in principle)
(d) unjustifiably favor the consumer over the merchant (at least in principle, if not ultimately in practice)
(e) perhaps make it more likely that people will wait until the last moment to get vital supplies, since they know there won't be massive price hikes during crises, exacerbating problems during crises
(f) make the market system less efficient
(e) create an unnecessary bureaucracy for investigating and prosecuting violators of the law, when there is already a market motivation not to unnecessarily alienate consumers
But don't take my word for it. See what economists think. Much of what I've said is empirically falsifiable.