In the of light of the COVID-19 pandemic almost every government in the world has (once again) denounced so-called “price gouging.” Politicians both to the left and right really think that with outlawing price gouging, they can save the consumer from the greedy gougers that are willing to take advantage and exploit consumers.
Price gouging is defined as the practice of raising a products price to an “unfair” or “excessive” level during a crisis or an emergency. However, anyone can understand that the law itself is very troubling since it remains unclear how high is “too high.” Of course, it ultimately depends on the arbitrary decision of the almighty bureaucrats and their own concept of how prices and markets should work.
They make the mistake of ignoring what a price really means. Price is a signal we use to understand how much do consumers really value a certain good. Value, as Ludwig Von Mises pointed out, is subjective the value of a good or service varies greatly by time and place. Again, value doesn’t exist in things themselves, but is formed in the minds of human beings. For example, a bottle of water has way bigger value for a person that is trapped in the Sahara desert rather to a person that has drinkable water from his tap in his house.
What we have here is a simple supply and demand. The demand is surging while on the other hand the supply (at least short term) is dwindling. High prices affect how the sellers and buyers act. For the consumer, they reduce the rising demand while encouraging conservation. By doing so these prices allow these products to be bought by other people that value them more and therefore are willing to pay more. Especially in a time of crisis, many people may want a specific product, but if prices don’t go up, those who are most in need are unlikely to even have the option of buying what they need most. Those items will have been hoarded by others because the goods remained at such a low price.
As we can see from today’s world, this is exactly the case, with goods like hand sanitizers and toilet paper being emptied from their shelves in just a matter of minutes. The beauty of the price system is that when unhampered, it manages to allocate resources to those who truly value them more. And those who value them more are often those with the greatest need. If people are willing to pay more than they would usually pay for a product that doesn’t mean that they are exploited. In reality it means that they value more Product ‘X’ for the “Y’ money they gave up. If they didn’t then the transaction would never take place.
Many places are now restricting purchases on items like hand sanitizers to two or three per person. But these rules can easily be bypassed through multiple store visits. Rationing favors also the wealthy and people that have the proper connections in the black market. Banning price “gouging” hurts people even more. When free pricing isn’t allowed, goods usually end up with people that are lucky to show up first and that’s often people with the best access to transportation and free time. There is nothing moral about that in reality it hurts people even more by destroying the incentives for conservation.
