By Stefanie Klaves
Like many other Americans, I struggled to find everything on my grocery list at the end of March 2020. Due to the coronavirus frenzy, shoppers have wiped out entire sections of grocery stores. There were no onions, broccoli, bananas, frozen vegetables, and most notably – no toilet paper.
What stood out to me was that despite the limited availability of products, there were still “on-sale” tags that lined the empty shelves. I wondered to myself why grocery stores would maintain normal prices – and even markdown items – when the products would have clearly sold out anyways.
What is Price Gouging?
Price-gouging laws are part of the answer to my question. Price gouging is defined as “the practice of raising prices on certain types of goods and services to an unfair level, especially during a state of emergency.” An example of price-gouging would be if Walmart raised the price of toilet paper to $50 to maximize profit from increased demand during the coronavirus frenzy.
Intuitively, Walmart’s action might seem unfair, maybe even immoral. After all, why should we allow Walmart to profit and “take advantage” of consumers during the global pandemic? In support of anti-price gouging laws, State Senator Ruth Johnson expressed that “one of our greatest strengths as Americans, and as humans, is to pull together in times of crisis and help each other… Unfortunately, there are some who instead seek excessive personal financial gain, and that is unacceptable.”
Senator Johnson is not alone. Laws in 36 states reflect the general sentiment that price gouging is unfair and unacceptable. In some states like New Jersey and New York, even a 10 percent increase in prices during an emergency is illegal. Online sellers like Amazon also have “zero tolerance policies” for price gouging and will remove vendors that violate them.
Price gouging laws are extremely relevant today because sellers would like to raise prices if they could. Recent incidents of price gouging include a store in Maine selling toilet paper for $10 per roll and an Ohio chain store selling thermometers for $26. In New York City, the government fined local businesses $275,000 for violating price gouging laws. Amazon has already removed 3,600 sellers for attempting to sell at unfair prices during the coronavirus emergency. Among those sellers is a man named Noah Colvin who took a 1,300-mile road trip to purchase 17,700 bottles of hand sanitizer that he sold for between $8-$70 each before Amazon suspended his account.
Why Price Gouging Should Be Allowed
Despite widespread support for price gouging laws, I argue that prohibiting the practice does more harm than good. Walmart increasing the price of toilet paper isn’t as immoral or unfair as it might initially sound.
A common misconception is that prices are unilaterally determined – that greedy sellers can increase prices to the detriment of consumers. In reality, the laws of supply and demand determine prices in a market economy. While sellers want to sell at the highest price possible and buyers want to buy at the lowest price possible, the point at which the two meet is called the equilibrium market price.
If sellers sell above the equilibrium price, there will be an excess of goods that consumers are unwilling to buy. If the government forces sellers to sell below the equilibrium price, then there will inevitably be a shortage of goods. In other words, there will be people that would have been willing to buy toilet paper at a higher price but are nonetheless not able to because of the price control.
In a world without price gouging laws, the price of toilet paper would better reflect the supply on hand and the value buyers place on the product. When Walmart increases its toilet paper prices, some consumers that initially stocked up on toilet paper will realize that they don’t value hoarding enough to pay the increased price. Other consumers – say, the consumers that are actually out of toilet paper – will be willing to pay the 10%, 20%, or even 30%+ price increase because they really don’t want to use alternatives to toilet paper (leaves, towels, or corn husks anyone?). In a free market, prices will naturally allocate resources towards those who need them most.
Higher prices also give manufacturers an increased incentive to produce more toilet paper, which then in turn, increases supply and decreases prices for consumers.
The Bottom Line
Without price gouging laws, toilet paper is more likely to get into the hands of the Americans that need it. Production would also increase in the absence of government-mandated price controls, which means more toilet paper for everyone. Rather than being unfair or immoral, a market without price gouging laws better upholds consumer welfare.