(The Center Square) — In times of economic uncertainty, retail customers sometimes witness what they consider unnecessary and sometimes unprincipled price spikes on household purchases.
When the price of a good is significantly greater in times of crisis than what the consumer is accustomed to paying during times of relative normalcy, the seller sometimes often is accused of price gouging.
Whereas some consumers and public figures claim retailer greed is behind increased prices, noted economists assert the additional costs serve as an efficient mechanism for hindering hoarding and assuring product availability.
These contrasting points of view have been brought into sharp relief from the onset of the coronavirus outbreak in the United States.
For example, Gov. Gretchen Whitmer, D-Mich., issued an executive order Sunday to criminalize price gouging after the office of Democratic Attorney General Dana Nessel reported 75 electronic complaints as of Friday. The number of complaints reached 181 on Monday.
According to the governor's order, people were selling face masks, hand sanitizers and cleaning supplies at “unjustified, exceptionally high prices,” the willful violation of which is a misdemeanor through April 13.
Whitmer's order identifies price gouging as any seller charging more than 20 percent of the amount he or she charged for the same item on March 9, unless the seller can legitimately attribute his or her price increases to additional costs of bringing the product to market.
Critics say that businesses raise prices to game panicked consumers, while supporters argue it reduces consumer hoarding and prevents shortages.
Mark Perry is an economics professor at University of Michigan–Flint and a visiting scholar at the American Enterprise Institute. Perry asserted in a social media post his conviction it is better to buy hand soap and toilet paper at temporarily elevated market prices rather than maintaining pre-emergency pricing, which will result in empty shelves and no availability of hand soap and toilet paper.
"What caused the recent shortages of face masks, hand sanitizer, cleaning supplies, toilet paper, and water?" Perry asked, and answered: "Panic, hoarding, over-buying by the greedy consumers who arrived early and depleted inventories, with NO concern at all for the many consumers who arrived later to find empty shelves."
Perry continued: "Will enforcing anti-price gouging laws address those shortages? No, it will make it worse," Perry wrote.
“I will not allow consumers to be taken advantage of during a public emergency,” Nessel said in a Monday news release. “I encourage consumers to continue filing complaints with my office so that we can properly investigate these complaints and determine what legal action must be taken.”
Steven Horwitz is an economics professor at Ball State University. He says that prices act as a signal in the supply and demand of goods.
In emergencies, sellers raise prices to higher levels.
About 34 states have laws prohibiting price gouging, but, similar to Perry, he told The Center Square those laws create worse problems.
“There’s a problem we need to solve here,” Horwitz said. “Because people are buying up this good or in a natural disaster because it’s been destroyed, there’s just not enough of the good to go around.”
Horwitz said that increased prices solve two problems: increasing the available supply of a good, and providing those goods at a price people can afford.
In the short term, increased prices discourage hoarding because they force buyers to make tough decisions about how to use goods wisely, Horwitz explained.
“You’re not going to buy 1,000 rolls of toilet paper if the price is very high,” he said. “You’re going to think carefully about how much you buy and what you’re using it for.”
The long-run benefit of price fluctuation is that a higher price signals other entrepreneurs to create more product supply, Horwitz said, which will drive down prices over time.
Surge pricing for ride-sharing services is the same idea.
Higher prices make sure people who take Ubers really need to take it, he said, and it attracts other drivers to get in their car and start working, which lowers fare price.
Laws preventing increased prices short circuit market solutions, Horwitz said.
“Anti gouging laws prevent prices from rising to ensure that existing stocks are used wisely and that more supplies become available for consumers,” Horwitz added. “Anti-gouging laws cause shortages.”
Matt Zwolinski, a philosophy professor at the University of San Diego, wrote a paper in 2008 for Business Ethics Quarterly in which he agreed with Horwitz and Perry.
"Price gouging is not inherently coercive, and if it is exploitative at all it is so in a way which makes it difficult to see why it is wrong (or, at least, more wrong than the actions of those who do nothing to help victims of emergencies)," Zwolinski wrote.
"Moreover, price gouging can serve morally admirable goals by promoting an efficient allocation of scarce and needed resources, and by creating economic signals which will lead to increases in the supply of needed goods available to desperate populations."