‘Price gouging’ during crisis a good thing

By Antony Davies and James Harrigan.

"America is officially in a national emergency over the coronavirus pandemic. As conditions rapidly change, medical experts are unable to provide answers to every question citizens will have.

But non-experts should be able to answer this basic question: “Should there be a nationwide shortage of toilet paper because of this?” No, there should not be.

And if there is a shortage of toilet paper, it should come as no surprise that any number of other products will be in short supply as well, chief among them surgical masks and hand sanitizer.
We offer no analysis on the wisdom of stockpiling these items. On their prices, though, some things should be painfully obvious.

First, when demand of a thing outpaces its supply, the price of the thing will rise. It doesn’t matter whether it’s oil, construction materials or even labor. This is why a $3 container of hand sanitizer can cost more than $100. Perhaps the only thing more ridiculous than buyers paying $100 for hand sanitizer is the call for anti-price gouging laws to prevent sellers from asking $100.

Among economists, price gouging isn’t a thing. The term simply reflects the emotional response non-economists have to rapid price increases. What politicians and other anti-price gouging proponents would have you believe is that we can have what we want, at the price we want, simply by passing a law. 

But anti-price gouging laws aren’t about buying hand sanitizer for $100 versus $3. They are about buying hand sanitizer for $100 versus not buying it at all.

This simple insight reveals why price gouging is actually a good thing. When things are in short supply, be it building supplies after a hurricane or surgical masks in the wake of the coronavirus, the few items available on local store shelves aren’t what’s important. What’s important is the supply line of more items coming in from around the country, and indeed the world, to the places that most need them.

And nothing gets those supply lines moving faster than a profit opportunity. The higher the price of hand sanitizer rises, the more incentive entrepreneurs have to divert shipments from where they are needed less to where they are needed more. The higher the price of surgical masks, the more incentive manufacturers have to work around the clock to make more, and to feed them into the supply lines.

In economic terms, shortages in the wake of the coronavirus, or a hurricane, or even seats at a Led Zeppelin reunion, are similar things. In each case, rising prices aren’t the problem. The problem is that people want more of something than what exists. Rising prices are a response to this reality — a response that incents buyers to buy judiciously, and sellers to rush more product to market.

Passing a law that holds the price down doesn’t change the reality that there isn’t enough to go around. But it does incent buyers to hoard and dissuades sellers from bringing more to market, which is exactly the opposite of what we want.

The best response to sellers who are asking exorbitant prices is, “Gouge away!”

Antony Davies is associate professor of economics at Duquesne University. James Harrigan is managing director of the Center for the Philosophy of Freedom at the University of Arizona. They host the weekly podcast, Words and Numbers."