With the rise of coronavirus (COVID-19), the age old debate of price gouging has become relevant again. Politicians and individuals try to use altruism as an excuse to speak poorly of price gouging. After all, it must be wrong or immoral to increase prices during a national emergency, right?
This debate resurfaces during natural disasters and other major events that may lead to shortages. However, the debate tends to be one sided. It’s bad optics for politicians and media outlets to discuss the benefits of increasing prices at the time when people need certain goods the most.
The reality is, humans are prone to panic and hysteria. Pictures are surfacing of stores with empty shelves where toilet paper once dwelt.
Videos of people fighting over products at stores are popping up on the internet.
According to The Washington Post, toilet paper shortages are occurring.
There are other product shortages as well. For example, The New York Times reported that the coronavirus has caused a shortage of hand sanitizer. These are not likely the only product shortages.
While the shortages are probably temporary, there is a question of what people should do if they need certain goods while these shortages continue. But the more important question is, how could these unnecessary shortages have been prevented? After all, the shortages were caused by panic purchasing.
The Economics of Price Gouging
To understand price gouging, let’s look at this market mechanism in terms of supply and demand.
Demand for certain products increase rapidly during natural disasters and national emergencies. As demand increases rapidly, supply can have a difficult time keeping up. This creates shortages.
Increasing prices incentivizes consumers to be more conscious about their purchasing decisions. In the case of the current pandemic, price gouging could help decrease the divide between people with too much and people with too little.
Meaning, price gouging would encourage people to purchase only what they need. This is important because it helps give everyone the opportunity to get the products they need during this pandemic.
Why Price Gouging is Important
Take our current situation as an example. Suppose the first comers to the stores buy up all the toilet paper, hand sanitizer, and hand soap; leaving a shortage, or none for anyone else. Hand soap is the first line of defense against the virus.
It’s dangerous for people to hoard all the hand soap and essential products. It leaves everyone else with a lack of necessary products, and potentially at a greater risk of contracting the virus. Those who run out of hand soap and are unable to obtain more may now be likely to contract and spread the virus.
Mass purchasing, at the very least, can create shortages and prevent others from obtaining the necessary items they need during this pandemic.
Whose fault is this? Is it the fault of those who, due to panic, purchased and hoarded all the essential products? No. They were merely overreacting to the situation.
Is it the fault of those who are unable to obtain needed products? No. They can’t help that there’s a shortage.
So, whose fault is it? Unnecessary shortages can be created from a refusal to recognize price gouging as a legitimate tool of the market.
This is just an example, some of which we are currently seeing. So how can price gouging help? Price gouging encourages consumers to purchase only what they need. This is important during a national emergency, like the current pandemic, because it helps prevent a supply shortage of necessary products.
Paradox of Value 