Price Gouging should be Legal for all Firms and Industries
Introduction
Nations across the world enact laws to regulate prices when they feel that providers of goods and services are exploiting their populations. Price controls always receive significant criticism from economists who argue that such actions are accompanied by objectionable consequences. Price gouging is a harsh way that providers of goods and services use to ensure market equilibrium. The providers normally use price gouging in the post-natural and man-made disasters. In response, the federal and state governments invoke contract rules under the civil-law and common-law traditions to regulate price gouging. Competition and anti-gouging laws have also been enacted to regulate price gouging. However, economists resist such laws and argue that price gouging should be made legal as controlling prices may lead to consequences, such as inefficiency, rationing, and shortages of goods and services.
Definition of Price Gouging
Efforts to define price gouging has proved difficult due to diverse views from economists and theorists. However, Chen provides a general meaning of price gouging as an attempt by providers of goods and services to “unreasonably” increase prices during supply shortages contributed by natural and artificial disasters (129). The governments have put in place mechanisms to regulate price gouging, including the use of civil-law and common-law traditions, as well as competition and anti-gouging laws. In the U.S., Stop Price Gouging Act was introduced in the Congress in February 2019, specifically for biopharmaceutical companies (Mello and Wolitz 869). The Act introduces an excise tax imposed on the sale of prescriptions drugs with the price spike. The Act was deliberately introduced to protect consumers from unwarranted price gouging by biopharmaceutical companies. Despite the use of these regulations, theorists and economists tend to oppose such efforts and call for the legalization of price gouging efforts to avoid the consequences on the flow of goods and services in the post-disaster period.
The need to Legalize Price Gouging for Firms and Industries
Price gouging is a natural phenomenon that requires the change in pricing due to shortages of essential products, especially after a disaster. Wilson argues that the demand for specific products increases post-disaster (55). As the supply for products remains at the pre-disaster level, disruptions for resupply of important products occur after a disaster. As a consequence, demand exceeds supply, and the markets react naturally and in a predictable way through the increase in prices until the supply is at par with the demand. Producers and manufacturers would react to the enhanced demand by increasing production as outside firms increase pricing to attract additional supply to the affected regions. The pricing would be determined by the demand and supply dynamics, and when equilibrium is met, prices of essential goods return to the normal level. Thus, legalizing price gouging allows the market to adjust naturally post-disaster until demand meets supply.
Price capping during a natural disaster is normally a government’s famous move in responding to the public outcry of a natural and predictable increase in prices. According to Wilson, price capping does not respect the economics perspective as it distorts the market demand and supply dynamics dictating the pricing (56). For instance, if the price of a commodity remains at the present level despite a required increase attributed to natural disasters, consumers would likely stockpile. As a consequence, stockpiling by the first consumers, in the case of shortages in the supply of a commodity, which is most likely to happen in the post-disaster period, would deny other consumers of the essential products. Thus, price capping by states through the use of anti-gouging and competition laws disadvantages consumers, and encouraging legal provisions for price gouging would address this technical issue.
Government’s efforts to use anti-gouging laws to keep the prices of products at the pre-disaster level prevent sellers and manufacturers from purchasing or producing additional stock. Ideally, disasters increase the costs of transportation and production and preventing firms and industries from factoring in these additional costs acts as a lack of economic incentive for increasing or sustaining supply. Moreover, firms may choose to withhold the existing stock to avoid replenishing their supply. The outside agents and entrepreneurs will also lack incentives to provide additional products to the market. As a result, a supply crisis would ensue, and legalizing price gouging would ensure that such an issue is prevented.
Conclusion
Price gouging across the world attract public protests forcing states to use anti-gouging laws to protect the citizenry from “exploitation”. During disasters, prices of specific goods increase and nations would invoke laws to regulate prices. Albeit the state’s efforts to regulate prices to protect citizens are welcomed, economists and theorists argue that there are no economic justifications for regulating prices in a perfectly competitive environment. They argue that legalizing price gouging is required to avoid the economic consequences of anti-gouging laws. Theorists and economists argue that disasters increase the demand for specific commodities, and this attracts a natural increase in prices to encourage enhanced supply to meet the demand. Also, price capping prevents firms from producing, leading to stockpiling by consumers. Anti-gouging laws also prevent firms from meeting the increased costs of transportation and production. As a result, firms lack incentives to produce more and meet the demand in the post-disaster era.
Works Cited
Chen, Andy C. M. “A market-Based and Synthesised Approach to Controlling Price Gouging.” International Journal for Private Law, vol. 4 no. 1, 2011, pp. 128-142.
Mello, Michelle M. and Wolitz, Rebecca E. “Legal Strategies for Reining in “Unconscionable” Prices for Prescription Drugs.” Northwestern University Law Review, vol. 114 no. 4, 2020, pp. 859-968.
Wilson, Debra. “Price Gouging, Construction Cartels or Repair Monopolies? Competition Law Issues following Natural Disasters.” Canterbury Law Review, vol. 20, 2014, pp. 53-90.