Editor's Note: The views and opinions expressed in this article do not reflect those of The Collegian.
Many people are revolted when they encounter instances of price gouging and see it as an immoral and destructive act that should be illegal. The economist Matt Zwolinski defines price gouging as a situation where “in the wake of an emergency, sellers of a certain necessary goods sharply raise their prices beyond the level needed to cover increased costs.”
I think that the traditional inclination against price gouging is misplaced and that raising prices in an emergency can have beneficial effects.
The New York Times reported that there have been shortages of basic goods like hand sanitizer, disinfectant wipes and toilet paper throughout the country during the COVID-19 pandemic. My family has been unable to find most of these items and has regularly found our local grocery store to be a wasteland of empty shelves.
In that same article, the New York Times found many instances of price gouging, such as milk being sold for $10 a gallon and 36 rolls of toilet paper going for $80. However, it is not just stores that are price gouging.
Take the recent case of brothers Matt and Noah Colvin, who crisscrossed Tennessee and Kentucky to buy 17,700 bottles of hand sanitizer and antibacterial wipes and began selling them online for between $8 and $70 apiece. The brothers ended up donating all of their supplies, but there is a strong argument the men were performing a public service whether or not they intended to donate them.
The reason the brothers are performing a public service is that they are maintaining a market structure that will most effectively work to reduce pandemic shortages. People will only pay these prices if they truly value them and if purchasing the item makes them better off. As prices and available supplies increase and demand ebbs, the brothers will be motivated to lower the prices to a new and lower market price that communicates to consumers that there is a more stable supply. This information is invaluable during an emergency.
Markets are incredible systems because of their ability to communicate information. When prices are dramatically raised in an emergency, it communicates information to both suppliers and consumers. Both consumers and suppliers respond to this information through the economic laws of supply and demand.
For suppliers, higher prices signal a need to enter that particular market and quickly increase supply. The higher the prices, the greater the incentive to start producing needed items. For consumers, higher prices make it more costly to purchase items, so as prices increase the demand for needed items declines. The increase in prices will have an even larger effect on the demand for large amounts of important supplies. Large costs make it more expensive to hoard items and use them inefficiently.
Ultimately, higher prices prompt an increase in supply and a decrease in demand, which is crucial to rationing basic necessities that are in short supply. The effect of high prices on the market is seen in the case of distilleries who are adapting in the market to now produce large amounts of hand sanitizer. Higher prices also encourage sellers like the Colvin brothers to move supplies online where people in hard-hit, faraway areas can purchase items online.
In an emergency it is essential that goods are allocated efficiently because lives are at stake. When people hear about a shortage, a natural instinct is to rush to the store and grab enough supplies to last through a shortage. However when everyone does that, some people end up with an excessive amount of supplies, while many others are left staring at empty shelves.
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This situation creates a tragedy of the commons where the rational incentives to stock up in the face of a pandemic shatter our ability to maintain a sustainable supply. Higher prices motivate efficient consumption, because it becomes very costly for people to hoard. In other words, increased prices make it less rational to spend a lot of money and stock up.
Some people rightly point out that if the price is allowed to rise on items in an emergency then the poor will not be able to access these needed items and suffer. The worry is that the market will serve the rich and not the poor.
I would point out that market pressures incentivize increased production, which will allow distribution of goods to the poor and rich alike. Nonetheless, I acknowledge that the market will not always work out as well as I described it.
Therefore, I think that the government should distribute cash transfers to people who need it the most, such as the poor, elderly and first responders. The market structure will be preserved, but the poor and vulnerable will have resources to buy needed supplies at increased prices.
The government recently signed a $2 trillion stimulus package into law to put cash in the people’s hands and should continue to support people in dire circumstances.
There is a catch to distributing cash, though.
People are only able to purchase a supply if one exists in the first place. There will not be a supply if it is not produced quickly enough or if many thousands of people invade stores to stockpile them. Price gouging is a necessary market mechanism to incentivize increases in supply and make it more costly for people to stockpile and waste resources. As increased supply floods the market, prices will be driven back down to a balanced equilibrium.
This pandemic has been devastating to our country, and everyone is looking for strategies to alleviate the pain caused by chronic shortages of needed items. I hope that we unleash the government and free market to most intelligently and efficiently solve these shortages. To achieve this aim, people will need to set aside their revulsion of price gouging and enlist it as an important player in this fight.
Contact opinions writer Alec Greven at firstname.lastname@example.org.
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