Mar

7

Price Signals, Price Gouging, and Philanthropy, by Peter Calcagno

In the wake of the (COVID-19) pandemic news outlets and politicians alike are discouraging everyone from price-gouging and hoarding. The question is why? We are told that to raise the prices during a crisis such as a natural disaster or a pandemic is cruel and unethical. However, as any good principles of economics student can tell you, price gouging laws only create price ceilings and shortages of goods. No one is directly calling for the capping of prices on goods during these times of crisis, but price gouging laws are effectively the same. Producers are afraid of raising prices for fear they may be reported as price gouging, and in many states, the burden of proof is on the producer to demonstrate they did not engage in price gouging.

The issue at hand is an old one in economics that people keep failing to learn. Prices are signals that contain information and incentives and help to ration goods. F.A. Hayek demonstrated that we do not have to know why prices are rising to understand how to behave. As consumers, we economize on goods, and producers understand that there is a greater demand for the product and should offer more to the market. What price gouging laws cannot do is change the scarcity of resources as Michael Munger explained to us years ago after Hurricane Fran. Instead, we have to find new ways to allocate scarce resources like waiting in line for first come, first served, or worse discriminatory practices. Yes, this sometimes forces us to make hard choices as to whether we should forgo the beer for toilet paper (or maybe it’s the other way around).

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