Price gouging
Price gouging is the practice of increasing the prices of goods, services, or commodities to a level much higher than is considered reasonable or fair. Usually, this event occurs after a demand or supply shock. This commonly applies to price increases of basic necessities after natural disasters. The term can also be used to refer to profits obtained by practices inconsistent with a competitive free market, or to windfall profits. In some jurisdictions of the United States during civil emergencies, price gouging is a specific crime. Price gouging is considered by some to be exploitative and unethical and by others to be a simple result of supply and demand.
Price gouging is similar to profiteering but can be distinguished by being short-term and localized and by being restricted to essentials such as food, clothing, shelter, medicine, and equipment needed to preserve life and property. In jurisdictions where there is no such crime, the term may still be used to pressure firms to refrain from such behavior. The term is used directly in laws and regulations in the United States and Canada,[1] but legislation exists internationally with similar regulatory purpose under existing competition laws.
The term is not in widespread use in mainstream economic theory, but it is sometimes used to refer to practices of a coercive monopoly that raises prices above the market rate that would otherwise prevail in a competitive environment.[2] Alternatively, it may refer to suppliers' benefiting to excess from a short-term change in the demand curve.
Price gouging became highly prevalent in news media in the wake of the COVID-19 pandemic, when state price gouging regulations went into effect due to the national emergency. The rise in public discourse was associated with increased shortages related to the COVID-19 pandemic.
Laws against price gouging[edit]
United States[edit]
In the United States, state laws against price gouging have been held as constitutional[3] at the state level as a valid exercise of the police power to preserve order during an emergency, and may be combined with anti-hoarding measures.
As of March 2021, 42 states have emergency regulations or price-gouging statutes[4] Price-gouging is often defined in terms of the three criteria listed below:[5]
Opposition to laws against price gouging[edit]
In a 2012 survey of leading American economists by the Initiative on Global Markets, only 8 percent agreed with a proposal to prohibit "unconscionably excessive" price gouging during natural disasters in Connecticut; 51 percent disagreed with the proposal, 15 percent were uncertain, and 8 percent had no opinion. The economists opposing the proposal argued that such legislation would lead to a misallocation of resources and to lower supply and greater scarcity of the resources, or that the proposal in question was vague.[43]
According to the theory of neoclassical economics, anti-price gouging laws prevent allocative efficiency. Allocative efficiency holds that when prices function properly, markets tend to allocate resources to their most valued uses. In turn, those who value the good the most and are able to afford it will pay a higher price than those who do not value the good as much or who are unable to afford it.[5] According to Friedrich Hayek in "The Use of Knowledge in Society", prices can act to coordinate the separate actions of different people as they seek to satisfy their desires.[44] Economists such as Thomas Sowell (Chicago School of economics), Donald J. Boudreaux (Austrian School and public choice), and Raymond Niles (Senior Fellow at the American Institute for Economic Research) argue that laws prohibiting price gouging dramatically worsen emergencies for both buyers and sellers.[45][46][47]