Price Gouging refers to the jump in price many essential goods face during a crisis situation. Anti-price gouging laws ban the act of grossly raising the price of goods during a declared state of emergency.
Economists are overwhelmingly against anti-price gouging laws. The reason is clear: anti-price gouging laws stem from a blatant misunderstanding of the free-market system, and it’s implementation will lead to a misallocation of resources. In a free market, suppliers and buyers compete, which leads to prices equilibrating such that resources are most effectively used. The high price of gloves or N95 masks reflects the fact that demand for these goods are higher. Suppliers will notice that demand is high and push prices up to alleviate the stress on their inventory, and those with extra masks or gloves are compensated more for providing those goods to where they are most needed. Here I will list the many problems with anti-price gouging laws:
Hoarding: higher prices during panic times can reduce hoarding tendencies of panicked individuals. Want to buy all the toilet paper in the store? Try doing so when it’s $12 a pack. In general, the higher prices will encourage people to buy carefully and therefore conserve scarce resources. Only those in dire need of the good will commit to the high price.
Discouraging Emergency Supplies: during non-pandemic times, some individuals may store large amounts of essential goods such as toilet paper, and wait for catastrophic events to take advantage of the high price and cash in. These people will earn a lot in this short period of time; they are paid for their proactiveness. However, if anti-price gouging laws prevent the price from moving to a profitable level, then there is no point in being proactive, and nobody will be incentivized to store larger quantities of emergency supplies for pandemics.
Supplier Incentives: When the price of ventilators and masks are extremely high, suppliers of like-products are incentivized to switch from their current task and tend to the more urgent task at hand. Garment manufacturers can switch to making masks, car manufacturers can be incentivized to retool their factories for making ventilators. But when prices are not allowed to go up, why would anyone make the effort into shifting their business practice? Ceasing car production and retooling your factory is very expensive; car manufacturers aren’t going to do it for free. Without allowing the price to rise, why would suppliers put themselves to the task?
Anti-price gouging laws affect more than pandemics. In natural disasters they can cause additional problems:
Discouraging Outsider Help: When a hurricane destroys a geographical area, goods such as potable water are in dire need. This need raises the price, which incentivizes those from outside the area from traveling there and bringing the needed goods with them. Anti-price gouging laws discourage this, leaving only the purely altruistic to travel to an inhospitable disaster zone.
Gasoline Hoarding: A common cry for anti-price gouging laws is the large spike in gas prices near natural disaster areas. However, critics are missing that this allows for rationing of much needed gas: When prices are $20 dollars a gallon, are you going fill your tank? Or are you going to get just enough gas to journey to the a cheaper, more distant gas station? The high price of gas allows more people to access the limited local supply, since individuals are encouraged to take only what is necessary. This allows more people to leave the disaster area.
Discouraging Backup Systems: High prices can incentivize businesses to have emergency systems to continue operations in disastrous times. A business can buy an expensive backup power supply so it can remain operational and charge higher prices in power outages. If those businesses are not allowed to charge higher prices, then buying the expensive equipment for those times is not worth it, as the business won’t be able to raise revenues over costs. Prepared businesses will face higher fixed costs over unprepared ones, so unless they can recoup the costs in times of emergency, they will be outcompeted by unprepared firms.
High prices in emergency times show the efficiency of the market. The prices push consumers to conserve and producers to reallocate their resources to producing and distributing the most needed items. This should not be something that is banned by law, but something that should be recognized as a useful way of helping those in need in times of emergency.
Updated 2020-06-08 (fixed a typo)