The efficacy of price gouging

Photo by John Middelkoop on Unsplash

We are currently in the middle of hurricane season here in the United States, with Dorian being the most notable hurricane to hit the U.S this year. With the influx of hurricanes comes the debate of price gouging; a debate that is brought up every time a hurricane-like Dorian makes landfall. In this article, I will attempt to discuss both the economical side of this issue and the human welfare side of things, as well as cover common criticisms and benefits of price gouging.

Price gouging is, put simply, the act of jacking up prices to a level much higher than normal during an extreme and sudden increase in demand or decrease of supply. These extreme and sudden increases in demand often occur during natural disasters like hurricanes. During hurricanes, the demand for basic goods and supplies skyrockets because everybody wants to buy those goods at the same time, and the supply can’t keep up. 

Before we get into the moral side of things, let’s talk about the economic implications of such a sudden increase in demand. 

When the demand for a product increases, it means that consumers are willing and able to buy more of that product at a market price. When this happens, this demand for the products starts to outpace the producer’s ability to supply that product, which causes an imbalance between supply and demand. In response to this imbalance, the most common response is for suppliers to increase the cost of the product to fund increased production of said product. This puts the supply and demand back in balance, just at a higher price.

Based on that statement, price gouging makes a fair bit of economic sense. However, there is a small exceptionality to supply and demand in the case of price gouging. In situations that often lead to price gouging, like natural disasters, suppliers are often limited to what they have on hand at the time. This is called short-run supply, and short-run supply is called inelastic. 

Basically, this means that the supply is unaffected by an increase in price. So in normal situations of increased demand, both the price and supply increase. In cases of price gouging, where supply is usually in the short-run, the supply is therefore not increased, meaning that the high demand will not be met with a higher supply; only a higher price.

This leads to one of the many complaints against price gouging. Because the supply is not being increased, but the prices are, people argue that suppliers are simply making more profit without actually benefiting consumers. While for the most part, I would agree with this statement, I would not say that customers are not being benefited in any way. For example, price gouging often prevents people from hoarding goods. If they remained at the same prices, richer people could buy all of the goods for themselves and leave little to none for the middle and lower classes. Raising the prices, in a way, prevents the hoarding of goods by a small number of people.

Despite this benefit, you still have the glaring issue of income inequality; if the price shoots up drastically, then fewer people of lower economic status will be able to afford crucial supplies like gas and food. This is where the heart of the moral argument against price gouging lies. Rich people can afford to pay the drastically increased price of goods. People of lower economic status, while needing these goods just as much, often aren’t able to afford the jacked-up prices and if they are it is so expensive that it has a negative impact on their future. Basically, the argument is that price gouging hurts exclusively lower-income people. It is likely because of this that price gouging is illegal in many jurisdictions. 

As for my take on this complex issue, I can see both sides. On the business side of things, I don’t think producers and suppliers jack-up prices with the purpose being to screw over poor people. The idea of price gouging makes logical economic sense and that is the mindset that many producers and suppliers are in. There are certainly some benefits to price gouging as well, such as the fact that it reduces hoarding. So I don’t think people who raise prices during natural disasters are evil by any means. In an ideal world, everybody would get as much as they need, and even more, but that’s not possible.

With that being said, I am not a big fan of price gouging. Although it attempts to prevent supply from running out immediately and keep it all from going to a select few, it doesn’t really do that. In fact, it leads to only a select few (the rich) being able to reasonably afford most of the goods being sold. This leaves lower-income people and families to decide whether or not to spend most of their pay-check on gas and some bread, or whether to tough it out during the storm and live off limited supplies. That’s simply not fair. 

So, while I understand and even admire that price gouging is trying to solve a crucial problem, it is doing more harm than good. People who are living through hurricanes have enough problems to deal with as it is and raising prices to a ridiculous level does not help.

One thought on “The efficacy of price gouging

  1. Nathan Davis

    You focus on the price gouging that occurs following natural disasters, mainly hurricanes, but do you think that the two main schools of thought that govern the reasoning behind price gouging in these circumstances still apply to the price gouging that occurs in the medical field. If so do you think one way is more relevant or are there other reasons behind the gouging of medical prices.

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