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Price gouging
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Price gouging is a pejorative term for a seller pricing much higher than is considered reasonable or fair. In precise, legal usage, it is the name of a felony that applies in some of the United States only during civil emergencies. In less precise usage, it can refer either to prices obtained by practices inconsistent with a competitive free market, or to windfall profits. Non-pejorative uses are generally in reaction to what the writer believes is an unjustified restraint on the market.
Economic theory suggests that, even in unusual circumstances, price ceilings prevent incentives for the supply of goods.
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Encyclopedia
Price gouging is a pejorative term for a seller pricing much higher than is considered reasonable or fair. In precise, legal usage, it is the name of a felony that applies in some of the United States only during civil emergencies. In less precise usage, it can refer either to prices obtained by practices inconsistent with a competitive free market, or to windfall profits. Non-pejorative uses are generally in reaction to what the writer believes is an unjustified restraint on the market.
Economic theory suggests that, even in unusual circumstances, price ceilings prevent incentives for the supply of goods. For example, in a disaster situation, a very high price for equipment (e.g. tents) will prompt hugely increased supply of the relevant goods. Libertarians are among those who think firms should be allowed to charge what they want regardless of the circumstances.
As a criminal offense, Florida's is reasonably typical. Price gouging may be charged when a supplier of essential goods or services sharply raises the prices asked in anticipation of or during a civil emergency, or when it cancels or dishonors contracts in order to take advantage of an increase in prices related to such an emergency. The model case is a retailer who increases the price of existing stocks of milk and bread when a hurricane is imminent. It is a defense to show that the price increase mostly reflects increased costs, such as running an emergency generator, or hazard pay for workers.
The term is similar to profiteering but can be distinguished by being short-term and localized, and by a restriction to essentials such as food, clothing, shelter, medicine and equipment needed to preserve life, limb and property. In jurisdictions where there is no such crime, the term may still be used to pressure firms to refrain from such behavior.
Some support the ability to raise prices under such circumstances, asserting that government prohibition of the practice is a violation of individual rights or that the ability to raise prices has beneficial effects or both. While some economists who defend the practice use the term "price gouging", others disparage it as merely pejorative.
The term is not in widespread use in economic theory but is sometimes used to refer to practices of a coercive monopoly which raises prices above the market rate that would otherwise prevail in a competitive environment. Alternatively, it may refer to suppliers' benefiting to excess from a short-term change in the demand curve.
Criticism
In the United States, laws against price gouging have been held constitutional as a valid exercise of the police power to preserve order during an emergency, and may be combined with anti-hoarding measures. Exceptions are prescribed for price increases that can be justified in terms of increased cost of supply, transportation or storage. Statutes generally give wide discretion not to prosecute: in 2004, Florida determined that one-third of complaints were unfounded, and a large fraction of the remainder were handled by consent decrees, rather than prosecution.
Advocacy
Many of those who oppose laws against price gouging view the rapid increase of prices as a valid system for rapidly distributing scarce resources to those who need them most and rewarding those who have prepared for potential scarcity by taking steps to provide the highly desirable resources. They also argue that since these systems do not reward the provider, there is decreased incentive for suppliers to plan for unusual demand situations, causing further scarcity.
Free market economists Thomas Sowell and Walter E. Williams, among others, argue against laws that interfere with large price changes. According to this view, high prices can be viewed as information for use in determining the best allocation of scarce resources for which there are multiple uses. They, in effect, reject the term "price gouging," and argue that laws against price increases serve only to restrict supplies of a good or service by reducing the incentive suppliers have to undertake any additional costs, hazards or inconvenience that may be required. They argue further saying that these price increases force consumers to ration goods thus increasing the longevity of certain resources in an emergency. Problems during the 1870 Siege of Paris, which critics attribute to price restrictions, are often held up as an example. In the same vein, economists Jerry Taylor and Peter VanDoren state: "Gougers are sending an important signal to market actors that something is scarce and that profits are available to those who produce or sell that something. Gouging thus sets off an economic chain reaction that ultimately remedies the shortages that led to the gouging in the first place."
See also
External links
- , Matt Zwolinski, Business Ethics Quarterly, vol. 18, no. 3 (July, 2008)
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- in the Congressional Record
- A criticism of laws against price gouging
- A defense of price gouging from an objectivist perspective
- by Jerry Taylor & Peter VanDoren
- by Robert Rapier
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- by Karen Selick, from The Globe and Mail
- podcast of discussion between economists Mike Munger and Russ Roberts on the effects of price gouging
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