About those 'price gougers'

  • 18 March 2020
  • NormanL

Politicians of all stripes and partisan affiliations are raging against what they see as a wave of price gouging for a number of high-demand household items. While cracking down on suddenly high prices may sound nice, it's really doing fundmental harm to the laws of supply and demand - and ultimately, to consumers. As Reason Magazine's J.D. Tuccille writes:

"Among economists, price gouging … simply reflects the emotional response non-economists have to rapid price increases," write Antony Davies, associate professor of economics at Duquesne University and James Harrigan, managing director of the Center for the Philosophy of Freedom at the University of Arizona, in a recent column. "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."

Laws can't change the market conditions that drive prices up. Prices for hand sanitizer, face masks, and easily stored food are rising right now not because sellers are mean, but because demand is rising relative to the immediately available supply.

Those rising prices tell consumers that what they want is now more valuable than before and should probably be used more sparingly or be replaced by something else, if possible. It also tells manufacturers and distributors that they should increase production, and where they should send the goods—if they're allowed to.

"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," Davies and Harrigan add. "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 short, prices are a very powerful form of information. We may not like the message this information delivers. But passing laws to try and stop it? That's a recipe for even more problems with supply and demand. Or the creation of black markets:

As economists repeatedly note, rising prices are unpleasant and unpopular, but they aren't the problem; the real problem is that demand is rising faster than supply. Rising prices cause temporary pain while telling suppliers that more is needed. Price-gouging laws, by contrast, falsely tell the public that politicians are watching out for them even as they extend shortages and the resulting pain.