The debate over price gouging always seems to make a noisy return in the wake of natural disasters, most recently with the hurricanes that devastated the Southeast and coastal regions of the United States.
Like most legislation, anti-price gouging laws lead to unintended consequences and don’t solve the problems they claim to. The reality is that the freedom for prices to rise and fall is an incredibly valuable function for society, and to intrude on this function is to harm society.
Here are 5 perspectives to keep in mind when people tell you price gouging is immoral, evil, and serves no valuable purpose:
1. Prices Convey Information About Supply and Demand
Prices act as signals that convey information to consumers and producers, and this helps them to coordinate their actions. When prices rise dramatically this signals to entrepreneurs and producers that there is a very high demand for these goods, and the high prices act as an incentive to flood the region with much needed supplies and resources.
2. Freedom for Prices to Rise Prevents the Hoarding of Goods
If the prices of essential goods are held artificially low by government legislation, then hoarders will stockpile the goods and resell them at higher prices on the black market. If the prices of these goods were allowed to rise naturally then the shelves will remain stocked and hoarding for the sake of profit won’t happen.
3. High Prices Promote Conservation and Efficient Use of Scarce Resources
If the price of a good rises dramatically, you are going to use less of that resource, and what you do use will go to where it is most needed. If the price of water skyrocketed people would stop watering their lawns and would instead save what water they had for its most urgent needs.
4. Anti-Price Gouging Laws Create More Opportunities for Exploitative Price Gouging
Under price controls where it is illegal to raise prices, goods will eventually run out and shelves will be empty. This forces people to turn to illegal, black market transactions, and it is here, with limited choices and competition, where people in dire need of these goods run the risk of being charged exorbitant prices with no alternative. Under a free market, free and open competition acts as a mechanism for accountability over fair pricing. If a firm charges exorbitant prices, they risk losing business to another competitor who charges less.
5. Perfection is Impossible: We Can Either Have Higher Prices or Empty Shelves.
During a natural disaster it is inevitable that prices will rise as goods become more scarce. We can either let prices rise as they’re supposed to, and still have stocked shelves with some choices, or keep the prices artificially low and have empty shelves with no choices.