What’s Wrong with Price Gouging?

In the wake of disasters like Hurricane Charley some businesses jack up prices of essential goods and services, something typically illegal under anti-price gouging laws. Should such laws exist? Prohibiting price gouging seems like the moral course of action, but doesn't it violate basic capitalist principles?

Mark A. R. Kleiman writes:

[F]rom the viewpoint of orthodox economic analysis it's hard to explain exactly why it's wrong, in the wake of a disaster, for someone who has a limited amount of ice or gasoline or tarpaper to sell, and a large number of customers for it, to charge whatever the market will bear.

The textbook analysis has a lot to be said for it: not only does the higher price encourage people to use as little as they can of the temporarily scarce good and encourage potential suppliers to spend what they need to spend in order to rush new supplies to the market, the prospect of higher prices encourages stockpiling in advance of potential disasters by merchants and consumers alike. (Since no one can cause a hurricane, there's no reason to fear perverse incentives.)

The case seems even stronger for services: if someone has the equipment and the skill to take fallen trees off the houses they've fallen across, we want that person out there working as many hours as possible, and being able to charge a high price will encourage that.

Of course it's natural for people to resent being ripped off, and they're well within their rights to refuse to pay the higher prices even if refusing to pay isn't the best move for them in purely material terms. But why should merchants who charge scarcity prices face legal repercussions? As far as I can tell, none of the politicians and pundits who preach the gospel of the market is rushing to the defense of price-gougers. There are significant practical differences, but morally there's not much difference between anti-gouging laws and, for example, rent control.

Mark notes that it is easy to argue in favor of anti-gouging laws — after all, a certain amount of solidarity and altruism are helpful for a society to emerge from a disaster; price gouging undermines that. Why, then, aren’t those who typically advocate laissez-faire economics complaining about these laws and calling for their elimination?

Read More:

• Guide to Ethics and Morality
• News About Ethics
• Bioethics
• Ethics and Culture