Price Gouging

Economic freedom is a willing buyer purchasing from a willing seller at a mutually agreed upon price without state interference. Curtailment of this freedom occurs if one party feels the terms of the prospective sale are unsatisfactory and so utilizes coercive state force against the other party. When the seller does it we call this “minimum price fixing” (e.g. minimum wage laws, crop price controls, etc.), which makes it a CRIME to sell below a government-mandated price. Likewise a buyer desirous of similar protection will petition the government to invoke anti-gouging laws or “maximum price fixing” which makes it a CRIME to sell above a certain price.

Price gouging is nearly universally reviled. Surely this is one place where we can agree that the government needs to step in, right? Wrong. There is nothing wrong with price “gouging” or “scalping”. These actions are merely manifestations of the law of supply and demand. Supply goes down, price goes up. This attracts other sellers, which thus opens the floodgates of competition, which increases supply and ultimately drives down price. “Gouging” is beneficial for two reasons: (a) it promotes a needs based market driven rationing of a scarce resource and (b) it ensures a consistent supply of a scarce resource.

A rising price ensures supply never goes to zero by incentivizing reduced consumption. No matter how scarce a good becomes there will always be some of it available to those who truly require that resource because they are willing to pay. If price is artificially suppressed when supply is short this invites those with early information to consume as they normally would, leaving none for those truly in need. Raising prices gives everyone an equal opportunity to partake in the resource even if they are last in the information chain. Some might say the rich have an unfair advantage, that they could buy everything up if we don’t force arbitrary rationing. But this is illogical. The argument is basically that the wealthy are compelled to buy up all expensive goods in short supply. Funny, there doesn’t seem to be a shortage of diamonds or gold watches. Some might then say the “poor” are excluded when price goes up. Perhaps if the price of gas went to $10,000/gallon, but in practice that can’t happen. Prices can’t exceed the level at which the population can pay. If they did the seller makes no money, so he must lower price until people are willing to pay. It will be less burdensome for the wealthy to pay higher prices, but that’s no different than during “normal” times. So if we don’t need government price controls during “normal” times then we don’t need them during “shortage” times.

High prices also afford the seller the ability to ensure continuing access to a scarce resource. For example, when Hurricane Katrina destroyed refining capacity it affected gas prices in Georgia. Gas prices went way up the next day. Surely this is unfair, right, the cost of the gas in the tanks didn’t suddenly go up overnight? No, this means the owner is exercising good business sense. Just think about it. If the station did not raise prices the amount of money they would get at the old price would not be enough to buy an equal quantity of “new” gas. This would only exacerbate the shortage. Raising price on current inventory ensures that the seller can completely replace it with more expensive inventory and outbid other stations if necessary. Sellers can’t provide their customers with a service if they have nothing to sell due to artificial price restrictions. Who do price restrictions help? No one. Or rather it helps the lucky few that buy early but only to the detriment of everyone else.

Even though at face value government control of economic relationships might seem beneficial (“stop those evil gougers”), ultimately unintended consequences end up harming the very people it was purported to help. If anyone has an area that they believe government should exercise economic controls please send me a note at and I will gladly do my best to debunk it in an upcoming column.