Libertarian Land: The Logic of Price Gouging

What do baby formula, gasoline, toilet paper, and bottled water have in common? All have in recent years faced the prospect of dramatic price hikes in response to rare events that dramatically limited supply or spiked demand. Think bacterial contamination at a major baby formula-making plant; the Russian invasion of Ukraine; the Covid pandemic; or Hurricane Katrina.Politicians and the public react by suggesting some form of price controls, labeling the hikes as “gouging” or “profiteering,” and then portraying suppliers as greedy and heartless. Many states have anti-price gouging laws on their books in anticipation of these events, while others impose them on an ad hoc basis.Price controls, however, are misguided and counterproductive. Higher prices in response to temporary imbalances between supply and demand are crucial to moderating shortages and limiting the adverse consequences of external shock to markets.Higher prices incentivize buyers to economize on the product, perhaps in ways they had not previously considered. Parents with young children can order baby formula from Europe, absent high tariffs or interference from the FDA.Owners of gasoline-powered cars can consolidate shopping trips, organize carpools, walk or bike to work, take public transportation, or watch Netflix at home rather than driving to the cinema. Every consumer or business that uses fossil fuels can adjust thermostats or clothing to reduce the demand for energy.Households lacking toilet paper can use tissues or paper towels and napkins, or simply fewer pieces of paper per trip to the bathroom. Those facing a shortage of potable water can limit their use to only drinking as opposed to handwashing or watering. All these responses are costly, but they are manageable for many users of such products, and they help limit the severity of price hikes. Higher prices also incentivize increased supply. Manufacturers of scarce goods can run double or triple shifts at their plant to expand production or run down their normal inventory to supply retailers at an extra profit.Foreign suppliers will often leap into demand holes created by higher prices, absent tariffs or other restrictions. Enterprising individuals outside a hurricane zone can load trucks with bottled war and transport it to disaster-ravaged areas. Higher prices make these results a possibility.Even the prospect of price controls — and especially anti-price-gouging laws — encourages hoarding in advance of their actual implementation as more savvy economic agents stockpile those goods to capitalize on expected shortages.This thinking comes straight from an Econ 101 textbook: standard supply and demand analysis predicts that price controls create shortages and short circuit the responses from buyers and sellers.Many still want price controls, however, out of misguided concerns over “equity.” In their view, price increases, while perhaps good for economic efficiency, harm the most economically vulnerable.Limiting price hikes, however, ends up worsening rather than easing equity. When price controls create shortages, which customers get to buy the (limited) quantity at the controlled price? Those with drivers or nannies who can stand in lines at gas stations to fill up; those with time and income to hire Uber drivers; those with quick laptops and speedy WiFi who can scour the internet for the product; those who can bribe an acquaintance in a different state to send toilet paper, or who have the liquidity to hoard in advance of an actual shortage. In the face of higher prices, higher income households will inevitably have the upper hand over lower income households, but this advantage widens to an even greater degree if government tries to control prices.In many cases, moreover, government actions cause or exacerbate the price hikes that spur calls for controls. The current baby formula shortage and price hike would be far smaller without the FDA’s unreasonable restrictions on European formula imports.Price surges for gasoline, oil, and natural gas would be easier to accommodate if United States and European governments did not impose such strong restrictions on fracking. The circumstances that cause major price hikes are large negative shocks to the economy or society, with costs that someone must bear (pandemics, wars, bacterial outbreaks). While market responses to such shocks help moderate their impact, price controls do the opposite.

Libertarian Land: The Logic of Price Gouging

Libertarian Land: The Logic of Price Gouging

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