A discussion on one of the most important topics in the crossroads between economics and ethics.

By Haanbi Kim

Price gouging refers to the economic phenomenon during which market prices significantly increase due to unexpected yet forceful market shocks, usually in the form of increased demand. Other natural disasters such as Hurricanes Katrina and Harvey stimulated gas prices to $20 per gallon and water to $99 per case (Garfield, 2017). From solely a moral standpoint, businesses can be seen as the villain, charging significantly higher prices than usual for profits and exploiting the consumer when they are at their lowest. Using this train of thought, politicians have constantly slammed businesses who engage in price hikes during times of panic. For instance, New York City has outlawed price hikes higher than 10% on “goods or services that are essential to health, safety or welfare,” along with 35 other states that have imposed similar laws. 

However, it is insufficient to come to a conclusion on price gouging solely based on the aforementioned issues. Many economists have criticized anti-price gouging laws because they misconstrue the fundamental purpose of prices: to allocate resources efficiently via indicating scarcity. Non-economists on the other hand interpret prices more as a “cost” one must give up to obtain a certain good or service. Given the economic purpose of pricing, price gouging seems to be a more justifiable phenomenon. To keep prices the way they were pre-panic will facilitate hoarding, and make more individuals worse off as there won’t be enough supply to keep up with demand. Jeremy Snyder mentions in an article from the Business Ethics Quarterly that “price increases can decrease consumption rates of essential goods,” meaning that prices have a function in restricting excessive consumption (Snyder, 2009). In the context of the coronavirus, no one needed to hoard vast amounts of toilet paper or antibacterial wipes to last them for years on end.  But, by limiting price functions, a “first come first serve” scenario ensued, with customers lining up hours before supermarkets opened. If prices had functioned freely, this situation would not have unfolded in the first place.To say that price gouging is an immoral act on part of the business and unfairly puts the producer at an unfair advantage is also misleading because price gouging ultimately generates a mutually beneficial transaction in which consumers are entitled to a legitimate chance at purchasing the good. Additionally, prices do not only signal when resources are scarce but also when and where products are in demand. In an excerpt from economist Thomas Sowell’s book Basic Economics he states that:

Supplies of all sorts of things that are usually needed after a hurricane strikes – flashlights, bottled water, gasoline and lumber, for example – are more likely to be rushed to the area likely to strike …  if suppliers anticipate higher prices. … But if only the usual prices in normal times can be expected, there is less incentive to incur the extra costs of rushing things to an area where disaster is expected to strike.

(Sowell, 2015)

Therefore, to generalize anti-price gouging laws as solely immoral is inaccurate, as anti-price gouging laws in themselves can exacerbate hoarding and discourage a “fairer” allocation of the most important supplies. Price gouging can put us in an overall worse off position before, than improve the welfare of everyone.

However, it is important to distinguish that a more equitable distribution across the market does not necessarily translate into a better society. Seeing gas prices shoot up to $20 is certainly distressing. Those who are in favor of the market pose that raising prices creates a generally more efficient allocation of goods, but an efficient allocation also doesn’t translate into an individually fair allocation. Even if increased prices mean that everyone gets an opportunity to purchase that necessity, it could be the case that one may not have the immediate disposable income to pay $99 for a case of water, along with the other necessities that may be needed in times of disaster. Snyder mentions in the same article that although prices have the aforementioned prohibitive effect on excessive consumption, they do so at the cost of providing the wealthy with more access to scarce goods, since the wealthy have a relatively more price inelastic demand (Snyder, 2009). In other words, although price gouging spreads out necessities consumed across many consumers, this cannot help everyone and many may not be able to afford the hiked prices. Matt Zwolinski, a professor in philosophy at the University of San Diego refers to this as a “mutually beneficial exploitation”:

On the one hand, to the extent that we hold that price gougers are guilty of mutually beneficial exploitation, we hold that they are acting wrongly even though their actions bring some benefit to disaster victims.

(Zwolinski, 2008)

Although we cannot discount the effort of prices in allocating goods when they are scarce, we also cannot overlook its dubious ethical qualities. This fundamental difference in scope of analysis, though both imperative, are also highly contradictory. Economic correctness does not mean ethical correctness.

In order to mitigate the controversies with price gouging, it is important to pass and enforce accommodating legislation. However, price gouging legislation is signaling extremely problematic features that do no one justice. Texas Tech Professor Michael Giberson mentions several problems with price gouging policy. First, current price gouging laws cannot be considered to cause little economic harm. A study done on price gouging laws discovered that a proposed national enforcement on it would have created $2 billion more in total economic losses during Hurricanes Katrina and Rita due to an “interference with incentives” to allocate scarce resources to where they are most needed. Second, the manner in which price gouging laws are defined is inconsistent. State laws use “imprecise terms such as ‘unconscionable,’ exorbitant,’ or ‘unreasonably excessive,’” which blurs the line between what is a just or unjust rise in prices. Finally, there is a trend in which price gouging laws are broadening their “scope and duration,” where these laws are “invoked more frequently” and are enforced for longer periods of time (Giberson, 2011). Under these circumstances, price gouging legislation must be in place to not only prevent an exploitative transaction, but also mitigate the volume of economic loss. Contrary to popular belief, it is difficult to conclude that price gouging is categorically malicious practice. That being said it is ill-advised to say that the economically allocative efficiency prices provide is an absolute benefit. Both the ethical and economic analyses on price gouging legislation are crucial in order to revamp its effect on society despite being contradictory. Creating a better strategy against market shocks during a panic would make the rest of the world a little less stressed. □

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Work Cited

1. Image source
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